BSP still not swayed by inflation with stimulus kept intact
MANILA, Philippines — Monetary authorities on Thursday demonstrated confidence a quickening inflation is bound to taper off later in the year, enough for them to maintain their accommodative stance for longer and protect the economy’s fledgling recovery.
The overnight borrowing rate will stay at 2% over the next 6 weeks, after which the stance will be reviewed again by the Bangko Sentral ng Pilipinas (BSP). There will also be no additional monetary stimulus during that period as banks’ reserve requirements were kept steady as well.
What’s new
In his policy announcement, BSP Governor Benjamin Diokno finally acknowledged that “latest inflation forecasts have shifted higher over the policy horizon” due to tight meat supplies. He was quickly seconded by his deputy, Francisco Dakila Jr., who said BSP now expects inflation for 2021 and 2022 at 4.2% and 2.8%, respectively.
Forecasts were faster than February’s 4% and 2.7% for both years, with this year’s outlook already breaching the BSP’s 2-4% annual target. A higher-than-anticipated turnout last month, plus impending increases due to climbing global oil prices were to blame.
But Dakila was unperturbed. “Our inflation path will actually be below 5% for the entire year. As I’ve mentioned, we see that inflation will remain above the high end of the target range until the third quarter of this year,” he said.
Why this matters
BSP has been at the forefront of trying to revive an economy that contracted a historic-high 9.5% last year. In the face of a new wave of infections, particularly in Metro Manila that accounts for 32% of economic output, central bank support signaling to banks to keep interest of their loans low is meant to encourage borrowing and lending so that funds are used to spend and invest.
However, Dakila has also acknowledged the limits of this strategy as credit continues to shrink. Lending slumped 2.7% year-on-year in February, the worst in 14 years, despite a 161-basis-point drop in loan rates because banks are simply reluctant to extend credit with unpaid loans accumulating.
What analysts say
Alex Holmes, Asia economist at Capital Economics, has this to say on Thursday’s decision of the BSP: “Provided that inflation does begin to fall back later in the year, then the door should be open for further easing.”
Nicholas Antonio Mapa, senior economist at ING Bank in Manila, was less dovish, projecting only that rates will be held steady for the entire 2021. “The central bank may consider a rate hike if inflation remains stubbornly high…,” Mapa said in a research note.
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