Julia Goh, Senior Economist at UOB Group, and Loke Siew Ting, Economist, assess the recent decision by the central bank of the Philippines (BSP) to keep the monetary policy unchanged at the February meeting.

Key Quotes

“Bangko Sentral ng Pilipinas (BSP), as expected, maintained its overnight reverse repurchase (RRP) rate at 2.00% on 11 Feb. Likewise, both the overnight lending and deposit rates were also left unchanged at 2.50% and 1.50%, respectively. The decision came as BSP sees inflation remaining elevated in the coming months while at the same time, acknowledging downside risks to growth prospects due to the emergence of new coronavirus variants and possible delays in mass vaccination programs.”

“To reflect the higher-than-expected jump in Jan inflation (to 4.2%), rising crude oil prices, and other external non-oil forces (i.e. global economic recovery from the pandemic with easing containment measures), BSP revised upwards its 2021 inflation projection to 4.0% (from 3.2% previously; UOB forecast: 4.0%).”

“That being said, the central bank expects headline inflation to go back within its target range of 2.0%-4.0% towards the later part of this year and into 2022 as supply-side influences subside and aided by higher year-ago base comparison. Hence, BSP revised downwards its 2022 inflation target to 2.7% (from 2.9% previously; UOB forecast: 2.5%).”

“For growth prospects, the central bank highlighted downside risks to the Philippine economy despite recent indicators of activity and sentiment showing some improvement. In our view, the nation’s economy will continue to recover and turn positive expansion from 2Q21 onwards. Base effects, further improvement in export sector, continued policy support and the vaccination program scheduled to start on 15 Feb are key growth drivers, amid lingering downside risks from the rise of new coronavirus variants and still lethargic labour market conditions. In the meantime, the government keeps its 2021 full-year growth target at 6.5%-7.5% (UOB forecast: 7.0%).”

“In sum, the overall tone of the latest monetary policy statement is deemed neutral. During the press briefing, Deputy Governor Francisco G. Dakila also continued to play down the increasing inflation risks, saying near-term inflation pressures triggered by supply-side shocks is not a cause for concern. It should not require monetary policy response unless they lead to further second round effects. Hence, we expect BSP to extend its rate pause until year-end for now.”