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Philippines: BSP to avoid pre-emptive tightening of policy
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is likely to avoid the pre-emptive tightening of its policy stance amid the continued decline in bank lending due to the impact of the pandemic, according to Fitch Solutions Country Risk and Industry Research.
The research arm of the Fitch Group said the BSP is likely to keep the benchmark interest rate at a record low of two percent until the first half of next year.
Fitch Solutions said the BSP is likely to maintain an accommodative monetary condition until loan growth and domestic economic activities are on a sustained recovery, and pandemic uncertainties have significantly abated.
“We at Fitch Solutions believe the BSP will only begin to hike once the Philippine economy is on a sustained economic recovery, and domestic demand-side price pressures become stronger, which we expect in the second half of 2022. Accordingly, we forecast a 50- basis- point key policy rate hike by end-2022,” it said.
The Monetary Board has kept interest rates unchanged for five straight rate setting meetings amid the challenges faced by the country due to the global health crisis, as well as uncertain path to economic recovery.
Despite the 200 basis points cumulative rate cuts last year, bank lending contracted by five percent to P8.99 trillion in April, faster than the 4.5 percent decline recorded in March as banks remained risk averse and the lack of demand from borrowers due to the pandemic.
The BSP’s COVID-19 response measures, including the reduction of the reserve requirement ratio for banks, have unleashed P2.2 trillion into the financial system.
“Subdued credit growth will prompt the BSP to keep monetary conditions loose for longer. We expect that the BSP will refrain from tightening monetary policy until loan growth returns to trend and we cannot rule out further cuts to the reserve requirement rate to bolster credit supply as economic growth accelerates in 2022,” Fitch Solutions said.
“We believe domestic demand-side price pressures will remain subdued in 2021 before rising through 2022 as the Philippine economy undertakes a more sustained recovery. The loss of income and employment opportunities for households, along with the uncertainty around lockdown measures, will dampen household demand in the near term,” it said.
Fitch Solutions sees inflation accelerating to four percent this year before easing to 3.4 percent next year due to rising global oil prices, as well as higher food prices particularly meat due to weather-related disturbances and the African swine fever (ASF) outbreak.
“We expect the surge in inflation to prove temporary on the back of a moderation in energy and food prices, as well as spare capacity within the Philippine economy over the coming quarters,” it said.
Source: https://www.philstar.com/business/2021/06/29/2108720/bsp-avoid-pre-emptive-tightening-policy