Philippines: BSP expected to remain on hold through 2021 – UOB

UOB Group’s Senior Economist Julia Goh and Economist Loke Siew Ting reviewed the latest monetary policy meeting by the central bank of the Philippines (BSP).

Key Quotes

“Bangko Sentral ng Pilipinas (BSP) decided to resume its rate cut today (19 Nov) as the resurgence of COVID-19 infections globally, muted business and household sentiment, and natural calamities at home could pose strong headwinds to the recovery of the domestic economy in the coming months. The overnight reverse repurchase (RRP) rate was cut by 25bps to a new low of 2.00% after being left untouched over the past two meetings. Both the overnight lending and deposit rates were also reduced in tandem to 2.50% and 1.50% respectively.”

“Today’s rate decision came against our estimate and Bloomberg consensus of a status quo. It also came after the 3Q20 real GDP contracted at a steeper-than-expected pace by -11.5% y/y as well as three strong typhoons (Quinta, Rolly, and Ulysses) in the past weeks have damaged about PHP25bn of infrastructure and farm output in the main Luzon island, which makes up 70% of the economy. These natural calamities will likely worsen the nation’s 2020 GDP contraction by 0.15% pts, prompting the Monetary Board (MB) to reckon that there remains a critical need for continuity policy support measures to bolster economic activity and boost market confidence.”

“During the press briefing, BSP Deputy Governor Francisco G. Dakila said growth prospects continue to hinge on when can the pandemic be resolved including the development of vaccines and enhancement of public health system, as well as how do households adjust to postpandemic environment. At this juncture, the central bank expects the economy to further gain on a seasonally adjustment quarter-on-quarter basis in 4Q20 and stage a strong rebound in 2021 (UOB forecasts: -9.5% for 2020 and +7.0% for 2021).”

“The BSP also tweaked its 2020 full-year inflation forecast up slightly to 2.4% (from 2.3% previously; UOB forecast: 2.5%), largely reflecting higher-than-expected actual inflation readings in Sep-Oct… However, the central bank revised downward its 2021 and 2022 full-year inflation projections to 2.7% and 2.9% respectively (from 2.8% and 3.0% previously; UOB forecast for 2021: 2.5%) due to expectations of slower domestic economic activity, lower global crude oil prices, and continued appreciation in the local currency (Peso, PHP).”

“Overall, the MB drew a dovish bias stance in today’s monetary policy statement as compared to that of in Oct… Notwithstanding, we expect BSP to hold rates steady next month (on 17 Dec, the last meeting of the year) and through 2021, counting on the assumptions of the availability of COVID-19 vaccines by 1H21, the enactment of larger national budget worth PHP4.506tr for 2021 by year-end, negative real interest rate through 2021, and narrowing interest rate differentials with other central banks. Fiscal support is deemed more effective in revitalising growth from the health crisis as compared to monetary policy.”