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BSP holds key interest rate steady

The Monetary Board said it has “observed early indications of improved mobility and sentiment” in the country despite the pandemic. — PHILIPPINE STAR/MICHAEL VARCAS

By Luz Wendy T. Noble, Reporter

THE BANGKO Sentral ng Pilipinas (BSP) on Thursday kept its benchmark interest rate steady, a move widely expected amid the recent uptick in inflation alongside some signs of economic recovery.

In its seventh and final policy-setting meeting for the year, the Monetary Board (MB) maintained the BSP’s overnight reverse repurchase, lending and deposit facilities at all-time lows of 2%, 2.5%, and 1.5%, respectively.

“[T]he MB is of the view that monetary policy settings remain appropriate. The MB believes that an accommodative monetary policy stance, together with sustained fiscal initiatives to ensure public welfare, should quicken the economy’s transition toward a sustainable recovery,” BSP Governor Benjamin E. Diokno said in an online briefing on Thursday.

The continued benign inflation was among key considerations for the decision, Mr. Diokno said. Noting the recent uptick in food prices was “transitory,” he said the future inflation trajectory will remain within the 2-4% target band set by the government.

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The BSP chief said the rollout of coronavirus disease 2019 (COVID-19) vaccines in other countries has boosted market confidence, “supporting improved prospects for global growth.” However, the optimism is tempered by the strict lockdowns implemented in countries experiencing a fresh wave of COVID-19 infections.

“On the domestic front, the MB also observed early indications of improved mobility and sentiment. While recent natural calamities could pose strong headwinds to growth, the further easing of quarantine measures should help facilitate the recovery of the economy in the coming months,” Mr. Diokno said.

The central bank has cut rates by a cumulative 200 basis points (bps) this year, the latest of which was the 25-bp reduction during its November meeting.

A BusinessWorld poll last week showed all 15 analysts expected the BSP to hold rates during Thursday’s meeting.

INFLATION
Meanwhile, the BSP upgraded its average inflation forecast to 2.6% (from 2.5%) in 2020 and 3.2% (from 2.7%) in 2021.

“The main factors that went into that revision — one is the increase in global crude oil prices,” BSP Deputy Governor Francisco G. Dakila, Jr. said in the same briefing.

“The second is the supply side, the pressures on the food front, and that is something that we see when we look at the November inflation outturn,” Mr. Dakila added.

The consumer price index rose by 3.3% in November, the fastest in 21 months, mainly on the back of the a quicker increase in food prices as a string of strong typhoons hit Luzon.

On the other hand, the BSP’s inflation outlook for 2022 was retained at 2.9%.

Going into 2021, Mr. Dakila said the country is already seeing some signs of early recovery in domestic activity, although there remained downside risks for domestic demand.

“This emphasizes the need for continued policy support from the BSP, and this support should continue to be in place until the economic recovery gets underway,” Mr. Dakila said.

Mr. Dakila is also bullish that “continued fiscal and monetary policy support will spur borrowing activity in the coming year,” given easing measures from the monetary side tend to work with a lag in the banking sector.

Lending growth in October stood at 1.9%, its slowest in 13 years amid tighter credit standards by banks and low consumer confidence. This, despite the 200 bps worth of rate cuts during the year.

Alex Holmes, an economist at Capital Economics, said economic growth in the next quarters will likely continue to disappoint.

“With the virus still not under control, restrictions will need to remain in place for longer, which will further hold back the recovery. Promising news on vaccines looks unlikely to quickly change the situation,” Mr. Holmes said in a note.

The Health department reported 454,447 COVID-19 infections as of Thursday, warning there may be a spike in cases after the holiday season.

Mr. Holmes noted the weak recovery trajectory will be reason enough for another round of easing in 2021.

“While higher oil price inflation will push up the headline rate early next year, the weakness of the economy will keep underlying price pressures subdued and inflation should stay within the BSP’s 2-4% target band,” he added.

On the other hand, a continued spike in inflation paired with faster economic recovery could make the BSP “less” accommodative in 2021, said Security Bank Corp. Chief Economist Robert Dan J. Roces.

“The BSP will be mindful that real policy rates have turned substantially negative and the effects this could have to both financial system and price stability,” Mr. Roces said in a Viber message.

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