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Philippines: BSP may keep rates unchanged this year
MANILA, Philippines — The significant upgrade in inflation forecast for 2022 just made it harder for the Bangko Sentral ng Pilipinas (BSP) to move toward normalization, according to international think tank Pantheon Macroeconomics.
In a report, Pantheon Macroeconomics said the BSP may keep rates on hold for the rest of 2022.
This after the BSP kept the interest rate for the overnight reverse repurchase facility at an all-time low of two percent.
However, it significantly raised its inflation outlook for the year at 4.3 percent from the 3.7 percent expectation in February.
The latest forecast breaches the two to four percent target range set by the government and is well above the 2021 inflation print of 3.9 percent.
“We doubt for a few reasons that this upgrade presages the start of normalization, and maintain that the overnight reverse repo rate will remain unchanged this year, at two percent,” Pantheon senior Asia economist Miguel Chanco said.
As of February, inflation remained at three percent but upside pressure is already seen in transport costs, as well as housing, water, electricity, gas and other fuels.
This as the conflict between Ukraine and Russia continues to escalate, resulting in soaring oil prices in the world market.
The BSP also jacked up its oil price forecast to $102.23 per barrel from $83.33 for this year.
“The BSP had no choice but to make something of a strong statement, in the wake of the surge in global oil prices sparked by Russia’s invasion of Ukraine, lest it risked losing credibility,” Chanco said.
He added that the central bank’s latest inflation forecasts are on the pessimistic side, as oil price disinflation still looks poised to take hold by the third quarter, even if it averages higher than the BSP’s revised baseline.
Chanco noted that the impact on transport inflation in the months ahead would not come anywhere close to the near 17 percent peak last year, and should subside quickly in the second half.
“If we are right and inflation averages at a more modest pace of 3.5 percent this year, then the narrative going forward is how the price data are undershooting expectations, not exactly a recipe for rate hikes,” he said.
Further, Chanco reminded the BSP’s move last year when it kept policy rates low as inflation hovered above four percent for the whole of 2021.
“The benchmark policy rates were held steady despite this persistent breach of target, with the BSP banking heavily on the government’s supply-side interventions to cool the then-rapid rate of food inflation,” Chanco said.
“Crucially, this appears to be Governor (Benjamin) Diokno’s preferred approach in the face of rising oil prices,” he said.
Moreover, the think tank argued that the country’s growth prospects this year are being inflated with market consensus expecting the BSP to hike rates by the third quarter.
However, Chanco said election-related headwinds to investment and government spending would have led to a substantial recalibration in economic growth forecasts.
“Even if our below-consensus 4.5 percent projection is wrong, the size of the economy will remain well below the pre-COVID-19 level and trend,” he said.
Source: https://www.philstar.com/business/2022/03/27/2170087/bsp-may-keep-rates-unchanged-year