MANILA – The Bangko Sentral ng Pilipinas (BSP) is projected to keep key rates steady until end-2020 because of within-target inflation rate and the need for more fiscal policy measures rather than monetary policy aid.
This, after the central bank’s policy-making Monetary Board (MB) kept for the second consecutive rate-setting meet the BSP’s policy rates on Thursday and even cut its average inflation projection for 2020-22.
In a research note dated October 1, ING Bank Manila senior economist Nicholas Mapa said the MB’s latest policy decision is as expected.
He noted the downward revision of the central bank’s average inflation forecasts for this year and the next two years, which are now at 2.3 percent, 2.8 percent, and 3 percent, respectively.
These were previously at 2.6 percent, 3 percent, and 3.1 percent, respectively.
“The central bank believes the price pressures will remain subdued over the policy horizon with risks to the outlook tilted to the downside,” he said, noting that “(BSP) Governor (Benjamin) Diokno signaled previously that he would pause for “at least 2 quarters” to allow the recent flurry of moves to take root.”
Citing BSP statements, Mapa said the central bank has, to date, released about PHP1.5 trillion into the financial system through its various policy decisions, which, in turn, is “helping keep borrowing costs floored to aid in the recovery.”
With the latest policy rate decision and the cut in the inflation outlook, Mapa discounted any change in the BSP’s policy rates in the near term “given that real policy rate remains negative with headline inflation at 2.4 percent.”
“BSP Governor Diokno will continue to monitor price developments over the policy horizon to determine if further policy action would be required,” he said, adding that “the central bank however did note the key role of fiscal policy for the pandemic response with the BSP hopeful that the recently passed fiscal stimulus package would complement the flurry of rate cuts and infusion of liquidity.”
Relatively, ANZ Research said that while the BSP kept its key policy rates unchanged it “re-emphasized its support in other ways, such as providing temporary funding to the government.”
It referred to the MB’s decision to approve the national government’s request for a provisional advance amounting to PHP540 billion, which is the second financial support for the year after the PHP300 billion extended through a repurchase agreement last March.
It said that while Philippine monetary officials’ rate decision is data-dependent “we do not expect any further cuts this year as the previous policy cuts will take time to pass through to the real economy.”
“Therefore, ensuring greater policy transmission is emerging as a key policy priority,” it said.
The report also noted the central bank’s point about the need for fiscal policy to help in the economy’s recovery.”
“We have stressed time and again that the fiscal policy has to become more aggressive,” it said, citing its expectations for a rise in government spending in the last quarter of this year “as the government will push through to exhaust the planned disbursements for the year.”
In terms of the provisional advances to the national government, ANZ Research expects the BSP “to provide this type of unconventional policy support.”
“Further rate cuts are, however, unlikely unless economic activity materially weakens anew,” it added. (PNA)