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Philippines: BSP to keep rates steady
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may extend its prudent pause by keeping interest rates unchanged anew on Thursday, but could deliver a surprise to support the pandemic-battered economy, according to analysts.
ING Bank Manila senior economist Nicholas Mapa said there is a chance for a surprise move by the Monetary Board by resuming interest rate cuts or lowering the reserve requirements ratio (RRR) for banks.
“Once again, we believe that the base case is for a pause, given the lack of efficacy at this point for additional monetary stimulus. However we assign an off chance for a surprise BSP rate cut or reduction in RRR as the BSP is handed the task of supporting the ailing economy yet again,” Mapa said.
Mapa explained the Philippines suffered another debacle due to Typhoons Ulysses and Rolly that aggravated the impact of the COVID-19 pandemic on the economy.
“This may not be the optimal solution (more fiscal stimulus would be), but it would be a move that BSP Governor Benjamin Diokno may take upon himself on Thursday, or as early as today, as the Philippines reels from the aftermath of several extreme weather disturbances on top of the fallout from the pandemic,” Mapa said.
The country’s GDP contracted by 10 percent from January to September as the economy stalled when Luzon was placed under enhanced community quarantine to curb the spread of COVID-19.
The Philippines slipped into recession with the GDP contracting by 11.5 percent in the third quarter, a record 16.9 percent in the second quarter, and 0.7 percent in the first quarter as the government imposed the longest and strictest lockdowns in the world.
“We would rather, however, have BSP pause next week and take a page out of the playbook of the US Fed and call for a more vigorous fiscal response to the ongoing pandemic rather than offloading more stimulus to an already bloated financial system with liquidity all dressed up with nowhere to go,” Mapa said.
The BSP has been doing the heavy lifting, unleashing P1.9 trillion into the financial system through various COVID-19 response measures including the cumulative 175 basis points rate cuts to an all-time low of 2.25 percent, the reduction of the RRR, the P540 billion provisional advance to the national government, the P300 billion repurchase agreement with the Bureau of the Treasury settled last September, the purchase of government securities in the secondary market, among others.
Real policy rates remain in the red at -0.25 as inflation averaged 2.5 percent from January to October, while the overnight reverse repurchase rate stood at an all-time low of 2.25 percent since the BSP adopted a prudent pause since June 25 to allow previous rate cuts to work their way through the economy.
“The BSP may find itself backed into a corner and forced to do even more of the heavy lifting to save the economy from outright collapse,” Mapa said.
Robert Dan Roces, chief economist at Security Bank, said the central bank is likely to keep interest rates steady on Thursday before a possible “nudge” next month.
“For now, I think the BSP will hold as it assess data prior to a likely nudge in the December meeting,” Roces said.
For his part, Philippine National Bank equity research head Alvin Joseph Arogo said the BSP is likely to maintain the benchmark rate at an all-time low of 2.25 percent until the first half of 2022 despite the uptick in inflation to 2.9 percent in 2021 and 3.2 percent in 2022 from the projected 2.5 percent this year.
“The reverse repurchase rate would stay at 2.25 percent until 2021 and the first half of 2022, ” Arogo said.
Jun Neri, lead economist at Ayala-led Bank of the Philippine Islands (BPI), said additional rate cuts from the BSP are unlikely in the near-term since doing so would expand the negative gap between the policy rate and inflation.
Source: https://www.philstar.com/business/2020/11/16/2057083/bsp-keep-rates-steady