The Bangko Sentral ng Pilipinas is expected to keep the policy interest rate at a record low of 2 percent this year, as the economy continues to grapple with the COVID-19 pandemic, Fitch Solutions, a unit of Fitch Group, said in a report Monday.
It issued the statement after the Monetary Board, the policy-making body of the BSP, maintained the policy rates unchanged last week, saying the elevated inflation rate could be transitory and might slow down in the coming months. Inflation rate in February rose to a 26-month high of 4.7 percent from 4.2 percent in January on higher food prices.
“Despite rising inflation, the domestic economy continues to struggle with the threat of another lockdown as the number of new COVID-19 cases rose in March. A combination of rising pork prices due to African Swine Fever and supply-chain disruptions from the pandemic has led to a surge in headline inflation, alongside external factors such as rising commodity prices,” Fitch Solutions said.
The government implemented a week of enhanced community quarantine in Metro Manila, Bulacan, Cavite, Laguna and Rizal from March 29 to April 4 to contain the spread of the disease.
“We expect the BSP to look past elevated inflation and instead focus on a sustained recovery in demand-side price pressures and credit growth. As such, we expect the BSP to stand pat through to 2022 before hiking its key policy rate to 2.75 percent,” Fitch Solutions said.
It said the BSP might begin hiking in 2022 as the economic recovery gathers steam, taking the key policy rate to 2.75 percent by end-2022.
Inflation may remain elevated in the near term, driven by supply-side factors, it said.
Fitch Solutions kept its forecast for headline inflation at 4 percent in 2021 and 3.4 percent in 2022.
It said the BSP would look to the slow domestic recovery as reason to keep monetary policy accommodative, particularly with uncertainty around the pandemic still high.
The Philippine economy contracted by a record 9.5 percent in 2020, the worst since the end of World War 2 because of the pandemic.
“We expect the economy to be in recovery by late-2021, and through 2022, leading the BSP to begin gradually hiking its key policy rate. The Philippine economy remains highly dependent on a resurgence in domestic consumption, and we expect—supported by growing credit and loose fiscal policy—demand to pick-up through the second half of 2021 and 2022,” it said.
“The BSP can hike slowly given the Philippines’ relatively strong external position and the high levels of spare capacity caused by the sharp recession,” it said.
The BSP cut the policy rates by a total of 200 basis points last year to 2 percent, the lowest on record, to boost the sluggish economy battered by the pandemic since early 2020.