Moody’s forecasts BSP slashing key rate in Q2

Published March 22, 2021, 3:33 PM

by Lee C. Chipongian

Financial intelligence company, Moody’s Analytics, said the Bangko Sentral ng Pilipinas (BSP) is not expected to move the policy rate this week but if the rise in new COVID-19 cases continue, it could cut benchmark rate in the second quarter this year.

“We expect the Philippines’ central bank to keep its key overnight borrowing rate unchanged at two percent at its March meeting,” said Moody’s in its latest weekly highlights and preview report. The BSP’s Monetary Board is meeting to review its policy stance on Thursday, March 25.

But, it added – “we expect that the central bank will opt to preserve ammunition for now and stall a rate cut until the next quarter if the domestic situation deteriorates.”

While most economists expect the BSP to remain on hold for the rest of 2021 after its last November 19 cut to two percent interest rate on its overnight reverse repurchase facility (RRP) which is the lowest rate on record, Moody’s said the increasing spread of the more infectious COVID-19 variants such as the UK and South African variants are alarming.

“The near-term prospects remain worrisome for the Philippines as it copes with an intensifying virus outbreak that shows no signs of abating,” it said. “(And) although the country’s fiscal spending has been more conservative relative to its Southeast Asian counterparts, the scope to deliver through a more expansionary monetary stance is relatively limited at this stage,” Moody’s added.

For most economists, including Alvin Argo of Philippine National Bank (PNB), Robert Dan Roces of Security Bank Corp., Nicholas Mapa of ING Bank and Emilio “Jun” Neri of Bank of the Philippine Islands (BPI), it is unlikely that BSP will move key rates anytime this year, as a cut or an increase.

“Raising interest rates amid a fragile economy and low credit expansion environment is counterproductive,” said Argo in a PNB press briefing Friday. He said the bank’s policy rate outlook remains at two percent all throughout 2021, with an above four percent inflation rate up to June this year before starting to come down in July at 3.9 percent and 2.6 percent by December. “Relative to the (US) Fed rate, there is no pressure for the BSP to raise the RRP,” he stressed.

BPI lead economist, Neri, agreed. “Inflationary pressures will likely prevent the BSP from cutting its policy rate further. Expanding the negative spread between interest rates and inflation may harm the economy in the long run and exacerbate portfolio outflows that could drive volatility in the currency market.”

Neri also said that the possibility of a rate hike is “slim right now given the economic situation”. However if price pressures result to a disanchoring of inflation expectations, the BSP could actually move up rates. “(We) are not discounting this especially if inflation becomes unmanageable,” said Neri. For now, he said the BSP “might justify its current policy stance by citing the supply side nature of the inflation problem and the limitation of monetary policy in addressing this.”

Security Bank’s chief analyst also said that the Monetary Board is expected to stay on course and stick to its current policy stance. “(BSP) may not be inclined to move policy rates at this time, hence we think policy rates to remain steady when the Monetary Board meets on March 25,” said Roces.

“With inflation cost-push driven, unemployment at 8.7 percent, 2020 GDP at -9.5 percent, and first quarter 2021 growth likely still in contraction, the BSP will still be doing the heavy lifting to support the economy, as the fiscal side will remain challenged with tepid revenue collections on soft economic activity and therefore remain prudent,” added Roces. He noted that since policy rate adjustments operate with a lag, the last November rate cut has not filtered through the economy yet. “Relative to inflation spikes, the BSP governor (Benjamin E. Diokno) has repeatedly sounded-off on the appropriateness of non-monetary measures to slow inflation given the supply-side nature of the price growth trajectory that may be transitory.”

For ING’s Mapa, the situation is a “hike when appropriate” thing and the BSP will “do all it can to help revive the flat-lining economy.”

“For the time being, with no evidence of second round effects so far, BSP will likely keep policy rates unchanged to give the economy and millions of Filipinos all the slack it will need in these challenging times. However, once second round effects begin to build and or inflation expectations are no longer anchored around the target, we believe BSP will carefully signal a necessary change in stance to nip any runaway inflation fears in the bud,” said Mapa.

Similar with Neri, the ING analyst has cautioned earlier about the adverse effects of the current negative real policy rates.

“Although we do recognize the possible ill effects that negative real policy rates may pose to the economy, we believe BSP recognizes the more pressing and important concern faced by the country as a whole: the ongoing recession,” said Mapa. He said the negative real policy rates have been known to “foment mispriced risks” which he said could drive asset price inflation during normal times. “(However) the pandemic pushes the BSP to tolerate a negative real policy rate for now to focus on getting the economy back on its feet. Furthermore, concerns about possible bubbles forming in sectors such as stocks and the real estate market appear to be less pressing as of the moment with evidence actually pointing to the opposite for the real estate sector,” said Mapa.

The lack of vaccine availability has been a nagging concern for GDP, BSP and market watchers. Moody’s has said that the Philippines may not get its herd immunity until 2023 because of the way government is handling the vaccination procurement and process. Still, the research company project local GDP could achieve over six percent growth this year, one of the fastest growth in the region amid the lingering pandemic.

“The recent rapid acceleration in cases complicates the economic recovery, fuelled in some part by the entry of the new variants that will undermine the economic bounce back and sap even more momentum from the economy,” noted Mapa in a recent commentary. “Rising inflation and the threat of rising borrowing costs compound the challenges faced by Filipinos exponentially as 2021 is now starting to look a lot like 2020.”

In the last few days, new COVID cases have been in the high 7,000-level, prompting the government to reinstitute tighter and stricter movement restrictions from March 22 until April 4, while still maintaining a general quarantine community status over Metro Manila.