BSP seen to keep key rates until H2 2022

MANILA – Fitch Group’s research arm forecasts that the Bangko Sentral ng Pilipinas (BSP) will hold to its current monetary policy until the second half of next year.

In a commentary released to reporters Monday, Fitch Solutions said BSP is expected to keep the record-low 2 percent overnight reverse repurchase (RRP) rate in the second semester next year before rising by 50 basis points before 2022 ends.

Fitch Solutions said it forecasted that the central bank will leave the benchmark interest rates unchanged on the back of inflationary pressure while maintaining the key rates until loan growth and domestic economy are on a sustained recovery and uncertainties due to coronavirus disease 2019 (Covid-19) pandemic have significantly subsided.

The Monetary Board kept the RRP rate at 2 percent, the overnight lending rate at 2.5 percent, and the overnight deposit rate at 1.5 percent during its meeting last June 24.

“The headline inflation rate remained flat for the third consecutive month in May at 4.5 percent year-on-year, above the 4-percent upper bound of the BSP’s target. Driving inflation higher has been the surge in commodity and food prices, as well as some supply-chain disruptions due to the pandemic,” Fitch Solutions said.

But the Fitch unit expects that inflation will fall back to the central bank’s target over the coming quarters as temporary factors fade.

Fitch Solutions sees the headline inflation rate for the Philippines at an average of 4 percent this year before easing to 3.4 percent next year.

“The lack of a commodities ‘supercycle’ would allay concerns within the BSP of persistent external inflationary pressures. Food price inflation will also prove temporary as the effects of the African swine fever outbreak on pork prices recedes over the coming quarters. In the May Purchasing Managers’ Index (PMI) report, manufacturers noted longer delivery times due to pandemic related disruptions,” it added.

Fitch Solutions, on the other hand, expects that supply chain disruptions will ease by 2022 with the gradual reopening of borders and relaxing mobility restrictions as the vaccination program starts to accelerate.

“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,” its commentary added.

It said that with the economic uncertainties brought by the pandemic, loan demands have begun to slow down and banks are becoming more risk-averse.

Loan growth among industries fell by 3.9 percent year-on-year in April while household spending went down by 10.2 percent from a year ago.

“Subdued credit growth will prompt the BSP to keep monetary conditions loose for longer,” Fitch Solutions said.