ING Bank Manila senior economist Nicholas Mapa
MANILA – An economist discounted a hike in the Bangko Sentral ng Pilipinas’ (BSP) key rates on Thursday, citing this would do little to address the elevated prices of meat and fuel products to date.
In a report, ING Bank Manila senior economist Nicholas Mapa said BSP Governor Benjamin Diokno, who earlier indicated against any adjustment in the BSP rates despite the elevated inflation rate, is “caught between a rock and a hard place.”
Mapa thus cited the lack of possibility for any adjustments in the BSP’s key policy rates until next year.
This, as the inflation rate last January rose for the fourth consecutive month and exceeded the government’s 2-4 percent target band until 2024 when it accelerated to 4.2 percent.
Mapa said all eyes are now on the first rate-setting meeting of the BSP’s policy-making Monetary Board (MB) for the year on Thursday.
He said Diokno has noted that inflation upticks are caused by supply-side pressures thus, there is less need for any monetary policy measure.
“Meanwhile, a rate hike at this stage of the game, with the economy still mired neck deep in recession, would derail the recovery efforts both by signaling a reversal in policy stance and make it even more difficult for cash strapped households and firms to access much-need funding,” he said.
Maps said Diokno is “likely aware of the limits of monetary policy and will be more circumspect in his actions to make every policy move count.”
Citing the impact of the rate hikes and the cuts in banks’ reserve requirement ratio (RRR) in 2018, which were aimed to address the elevated inflation rate that time, Mapa said monetary authorities will be more circumspect this time.
He said these measures “confounded market players, hiking policy rates but simultaneously releasing tons of liquidity into financial markets.”
“The series of moves did little to quell inflation nor allay concerns about accelerating price gains, culminating in a severe breach of the inflation target and, just as detrimental, a broadside to bank lending momentum that impaired capital formation for months to come,” he added.
Mapa said “inaction is action” this time, adding that “at this juncture, keeping policy rates unchanged would allow BSP to provide the economy support for the recovery while at the same time safeguard against any budding demand side pressure, which appears to be negligible at the moment.”
He added Diokno appears ready to accommodate the first round of inflationary pressure and only consider acting should signs of second round effects (wage and transport fare adjustments) threaten a structural impact on the inflation path.
“Given that the economy remains deep in recession and is not likely to see a stark pickup in growth momentum soon, we do believe that BSP will be on a ‘long pause’ unless 2nd round effects become apparent or if demand side pressures surface,” Mapa said.
He said while “risk of running real negative real rates is indeed real, the marching orders of the day continue to be a concerted push to jump start the economy, with BSP Governor Diokno doing his share to uplift growth all the while cognizant of the risks of running negative policy rates.” (PNA)
