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Philippines Monetary Policy February 2022

Philippines: Central Bank keeps rates unchanged in February

At its monetary policy meeting on 17 February, the Central Bank of the Philippines (BSP) maintained the overnight reverse repurchase facility rate at its record low of 2.00%, marking the tenth 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.

Inflation expectations and the Bank’s inflation forecasts for 2022 and 2023 increased slightly compared to its previous meeting, largely due to higher oil prices. However, inflation is still projected as remaining below the upper band of the Bank’s 2.0%–4.0% target band in 2022, and falling further to the middle of the band in 2023. 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, significantly, it laid out the Bank’s exit plan from its current extraordinarily loose monetary policy for the first time, having been pushed to do so by the strong recent performance of GDP growth and the labor market, as well as improvements in domestic financial markets. The Bank reiterated that inflation risks for this year remain to the upside and, were such risks to materialize, this could put pressure on the Bank to hike rates—especially amid a more hawkish Fed and a depreciating peso. Indeed, most panelists now see rates rising in 2022, although a few still see rates on hold.

Nomura’s Euben Paracuelles and Rangga Cipta remain skeptical that the change in the Bank’s language signals a significant shift in near-term policy:

“While BSP’s forward guidance was changed, we think this was not intended to signal that policy normalization in the form of lift-off in the policy rate is likely soon. If anything, the governor highlighted that some extraordinary policies have already been reduced, with BSP’s government bond purchases in the secondary markets already declining gradually, while advances to the Treasury were reduced to PHP 300 billion in January versus PHP 540 billion last year. This comment, in our view, suggests BSP’s statement about planning an eventual policy normalization is to underscore that some small steps have been carefully taken and hence should be not be viewed as a new signal that BSP is already moving away from its priority of supporting the recovery.”

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