BSP maintains interest rates at 2%, expects inflation to go over 2021 target range

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Metro Manila (CNN Philippines, March 25) — The Bangko Sentral ng Pilipinas has again kept policy interest rates to their current all-time low, hoping that lower borrowing costs would help hasten the economic recovery.

The Monetary Board voted on Thursday to keep the key interest rate at 2%, the same level since November last year. This is the lowest on record as the local economy stays in recession, with quarantine restrictions still getting in the way of a full recovery, economists believe.

Banks and other lending firms are guided by the BSP's rates in pricing their own loans, credit card, and deposit rates. So far, both lenders and borrowers continue to avoid risks because of uncertainties brought about by the pandemic, with the amount of loans extended by bank contracting annually for the second straight month in January.

The policymaking Monetary Board also retained overnight deposit and lending rates at 1.5% and 2.5%, respectively.

The Philippine economy continues to wiggle out of a recession that saw national output decline by 9.5% for the entire 2020. This was the worst plunge on record since the government began collating data on full-year economic growth in 1946.

In a virtual briefing Thursday, BSP Governor Benjamin Diokno said the recent spike in COVID-19 cases and the challenges surrounding the country's vaccine rollout continue to affect domestic demand prospects.

The country’s main economic hub, Metro Manila, remains under a stricter general community quarantine as part of the NCR Plus ‘bubble’ along with adjacent provinces Bulacan, Cavite, Laguna and Rizal. No one is allowed to enter nor exit the bubble unless they are authorized persons outside residence, or APORs.

Most parts of the Philippines are under the more relaxed modified GCQ.

2021 inflation expected to breach year's target range

The BSP chief likewise flagged the upward shift in the agency's inflation forecasts particularly this 2021, owing to constraints on supplies of main food commodities and the ongoing uptick in global oil prices.

The central bank estimates inflation could accelerate to 4.2% this year, faster than the 4% forecast announced by BSP Deputy Governor Francisco Dakila Jr. in February. This is also above the government's target range of 2% to 4% for the year. He also revealed a revised 2.8% inflation forecast for 2022, a tad higher than the previous 2.7% projection.

"We see that inflation will remain above the high end of the target range until the third quarter of this year. The path is really what you can expect following supply-side shocks,” said Dakila, although noting these are temporary and transitory in nature.

Commenting on that outlook, ANZ Research said the BSP has "turned more cautious on the underlying inflationary impulse."

The government recorded a 4.7% inflation rate in February, the quickest in over two years. To date, the 2021 average inflation is running at 4.5%.

Still, Dakila assured the public the rising inflation will not trigger an “earlier-than-planned” departure from the BSP’s policy stimulus measures.

"The monetary policy stance shall continue to be supportive of the economy until such time that the recovery becomes fully self-sustaining," he said.

ANZ Research said it does not expect any change in the central bank's policy settings for the rest of 2021, instead projecting a greater focus on beefing up policy transmission and enhancing credit growth.

The BSP has consistently maintained that the uptick in inflation is driven by supply shocks, particularly with the African Swine Fever trimming the country's pork supply. The Agriculture Department has since formally recommended the declaration of a national state of emergency over ASF, also pitching increasing pork imports under the minimum access volume scheme and lowering hog import tariffs.

With this, it reiterated the importance of the "timely" enactment of such non-monetary interventions to temper the effect of supply-side pressures on inflation. This will avoid any possible second-round effects from spilling over to other basic commodities, it said.

"BSP may only consider a possible rate hike should inflation remain stubbornly high, which could disanchor inflation expectations and spark second round effects such as wage and transport fare adjustments," ING Bank senior economist Nicholas Mapa said in a market commentary.