Low interest rates to stay until mid-2022 – Citi

MANILA, Philippines — Global banking giant Citi said the Bangko Sentral ng Pilipinas (BSP) would keep the low interest rate regime until the middle of next year as the resurgence of COVID-19 cases further delays the country’s recovery from the pandemic-induced recession.

Nalin Chutchotitham, Citi economist for the Philippines, said the central bank’s Monetary Board is seen keeping the benchmark interest rate at an all-time low of two percent until the middle of 2022 after the government imposed fresh mobility restrictions in the National Capital Region (NCR) and nearby provinces amid the surge in COVID-19 cases.

“We continue to expect the BSP to keep interest rate on hold at two percent until mid-2022 due to increased downside risks to economic growth,” Chutchotitham said.

The BSP emerged as one of the most aggressive central banks in the world after it slashed interest rates by 200 basis points and lowered the reserve requirement ratio of banks last year to contain the impact of the COVID-19 pandemic on the economy.

The central bank has kept its interest rates unchanged since the 25-basis points cut last November that brought the benchmark rate to a record low of two percent.

The second rate-setting meeting of the Monetary Board this year is scheduled on Thursday.

“The BSP is expected to keep its main policy rate unchanged at two percent on March 25,” Chutchotitham said, adding growth concerns are expected to outweigh higher inflation as the surge in COVID-19 cases prompted the imposition of new travel restrictions.

The BSP has maintained its accommodative policy as gross domestic product (GDP) shrank by a record 9.5 percent last year, ending more than two decades of growth.

The economy stalled as the government imposed the longest and strictest lockdowns in the world when it placed Luzon under enhanced community quarantine in the middle of March last year.

With the reopening of the economy when NCR shifted to general community quarantine in June last year, economic managers now expect a rebound with a GDP growth of 6.5 to 7.5 percent this year.

However, Chutchotitham said the decision of the government to place more restrictions for travel in Manila and nearby areas for two weeks could further derail the projected economic recovery.

“This means there remain downside risks to our 2021 GDP growth forecast should the current restrictions be prolonged amid a slow rollout of vaccines and containment of the COVID-19 spread,” Chutchotitham said.

Citi has penned a GDP growth of seven percent for 2021, and raised its inflation forecast to 4.2 percent instead of 3.6 percent this year due to higher oil and food prices..

The Citi economist said the BSP could still raise its near-term inflation forecast on the back of higher global crude oil prices, but likely highlighted the downside risks to inflation on the back of weak economic recovery.

“While food prices remain a concern and inflation is likely to stay above the policy target in Q2, weak employment would help keep domestic demand pressures in check,” Chutchotitham said.

According to Citi, economic recovery and fiscal deficit are likely to worsen significantly should the harsh lockdowns similar to that of last year are imposed by the government.