BSP seen to keep policy rate, RRR on hold
AFTER a year of aggressive monetary-policy easing, the Bangko Sentral ng Pilipinas (BSP) is expected to hold monetary-policy settings unchanged for the entire 2020, a banking economist said.
Speaking at ING’s Economic Briefing on Monday, ING Bank economist Nicholas Mapa said the Central Bank will likely keep both the main monetary-policy rate and the reserve requirement ratio (RRR) of banks on hold for the entire year.
“By pausing, they are keeping the 2 percent as it is still quite accommodative. They are keeping the support in terms of monetary stimulus while at the same time pausing from their recent rate cut cycle given the inflation dynamics right now,” Mapa said.
In 2020, the BSP aggressively cut its interest rates to spur activity in the local economy. In total, the Central Bank has already cut its rates by 200 basis points to push its overnight reverse repurchase rate at an all-time low of 2 percent.
Just last week, the BSP decided to keep all monetary policy levers untouched, alongside their inflation forecast revision to 4 percent on average for 2021.
This is after inflation hit a two-year high in January at 4.2 percent, overshooting the government’s annual 2 to 4 percent target range on average for the year.
“As most people have noted, the BSP has done most of the heavy lifting so I think they pause for now. This pause allows them to still provide stimulus given the low rates and at the same time keep their inflation targeting price stability mandate upheld,” Mapa said.
“Rate cuts are off the table for now, given the inflation dynamics; and even when inflation fades towards the end of the year, I still think that the governor will keep to it with the long pause for the full year,” he added.
Rate hikes are also out of the question, Mapa said, as the economy remains weak and monetary policy tightening will likely do more harm than good for the economy.
“So with the labor market slack and the general weakness in the economy, we can’t see the BSP reacting quite aggressively to this inflation spike,” Mapa said.
“Another thing is, the last time inflation breached the target was in 2018 when inflation hit 6.7 percent. Back then the currency was weaker by about 9 to 10 percent at the worst of it. Where the peso is right now should mitigate some of that imported inflation and we will likely see a not as high a peak as we saw in 2018,” the economist added.
As for the reserve requirement ratio (RRR), Mapa said the BSP is also likely to keep it at current levels as the economy is flushed with liquidity, with banks refusing to lend.
“With all the liquidity that is out there, it is not likely that they will resort to adding another P200 billion. That is just probably going to return to them. I think the RRR decision is likely to be on hold given that no matter what liquidity they release in the system, it is likely to just stay with them,” Mapa said.
There is not a lot of movement in bank lending yet, he added, so “any changes to RRR anytime soon” are not likely.
Earlier this month, the BSP announced that bank lending entered contraction territory for the first time in 14 years at the end of 2020.
BSP data showed that the outstanding loans of universal and commercial banks declined by 0.7 percent in December 2020, further decelerating from the 0.5 percent growth seen in November.