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Philippines Monetary Policy December 2021

Philippines: Central Bank keeps rates unchanged in December

At its monetary policy meeting on 15 December, the Central Bank of the Philippines maintained the overnight reverse repurchase facility rate at its record low of 2.00%, marking the ninth successive hold and matching market analysts’ expectations. Likewise, the overnight deposit facility and the overnight lending facility rates—which establish the floor and the ceiling of the interest rate corridor—were left at 1.50% and 2.50%, respectively. The Bank’s inflation forecasts for 2021 and 2022 were raised slightly compared to its previous meeting, but inflation for 2023 is seen close to the middle of its 2.0%–4.0% target band. Moreover, market inflation expectations remain anchored at the target level. Meanwhile, the Bank noted that new Covid-19 variants pose downside risks to the outlook. The combination of an uncertain economic outlook and manageable inflation projections pushed the Bank to retain its accommodative monetary stance.

The Bank’s communiqué did not give explicit forward guidance, but its tone appeared to turn slightly more hawkish, stating that it will seek to “support” the economy instead of “prioritizing” it. Moreover, the Bank reiterated that inflation risks for 2022 were mainly skewed to the upside. If these upside risks materialize, this could put pressure on the Bank to hike. Indeed, most panelists now see rates rising in 2022, although several still see rates on hold.

Analysts at HSBC see the challenge posed by inflation pushing the Bank to increase rates next year:

“Inflation remains another big challenge for the economy. Higher food and fuel prices have kept inflation above the Central Bank’s target for much of 2021. […] We expect the BSP to hike the policy rate by 50bp in H2 2022 followed by 50bp of hikes in 2023—a slightly slower pace of tightening compared to the 125bp of cumulative policy rate hikes we expect the Federal Reserve to deliver.”

ANZ’s Debalika Sarkar and Jennifer Kusuma, meanwhile, predict a more persistent dovish stance, noting ongoing softness in the economy:

“The Philippine economy, while showing signs of improvements, is still several steps away from a full-blown economic recovery. In particular, the critical drivers of private consumption have remained weak and the country’s vaccination coverage is one of the lowest in the region. The government’s reopening plans were also put on hold with the emergence of the new virus strain in late November. Policy support, which remains instrumental for economic recovery, will remain accommodative, in our view.”

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