Philippines: Steady hand from the BSP – UOB

Julia Goh, Senior Economist, and Economist Loke Siew Ting at UOB Group assess the latest BSP event.

Key Quotes

“Bangko Sentral ng Pilipinas (BSP), as expected, maintained its accommodative monetary policy stance for the fourth straight meeting today (12 May). The overnight reverse repurchase (RRP) rate was left unchanged at 2.00%, the overnight deposit rate was kept at 1.50%, while the lending rate was held steady at 2.50%. This decision came after the country posted a steeper-thanexpected GDP contraction in 1Q21 yesterday (11 May) while inflation is heading north due to cost-pushed factors and base effects.”

“In the latest monetary policy statement, BSP cited confidence that the prevailing monetary policy settings remain appropriate to facilitate the nation’s economic recovery towards a sustainable path. While the growth outlook is still subjected to downside risks due to rising COVID-19 infections, the central bank expects the government’s targeted fiscal interventions, ongoing rollout of the vaccination program, and an improved external environment to continue reinforcing the domestic economic recovery in the coming months. It added that real GDP growth will turn positive beginning 2Q21 and into 2022, mostly aided by favourable base effects and the continuation of government policy support amid a promising rebound in global demand.”

“On the inflation front, BSP is now projecting headline inflation to march up at a slower pace than it previously anticipated, to an average of 3.9% this year (vs. previous estimate of 4.2%; UOB forecast: 4.0%; 2020: 2.6%).”

“Nevertheless, the central bank adjusted its 2022 inflation forecast higher by 0.2% point to 3.0% (UOB forecast: 3.0%), largely premised on expectations of higher global oil prices, faster domestic demand expansion, and stronger global growth next year. In other words, BSP sees balanced risks to the overall inflation outlook and projects inflation to settle within its 2.0%-4.0% target range in 2021 and 2022.”

“Given that BSP has removed its concerns about the build-up of second round inflationary pressures in today’s statement and remains confident that the domestic economy will continue to improve in the near term, we believe the BSP will keep its power dry and use its ammunition with caution as the year progresses… Hence, we expect the RRP rate to be kept at 2.00% for the rest of the year. The next monetary policy decision will be on 23 Jun.”