Fitch Solutions, a unit of Fitch Group, said Thursday it expects the Bangko Sentral ng Pilipinas to keep the policy rate unchanged at a record low of 2 percent for the entire year despite the COVID-19 pandemic.
Fitch Solutions said in a report the decision of the Bangko Sentral ng Pilipinas on Wednesday to hold the policy rate was in line with expectations.
“Indeed, we maintain our forecast for the key policy rate to stand at 2 percent by end-2021 and see downside risks to our outlook for three 25bps [basis point] rate hikes in 2022, given the Philippines continued struggles with managing the COVID-19 pandemic,” Fitch Solutions said.
It said the surge in new COVID-19 cases and the lockdown measures implemented since late-March and through May would weigh substantially on domestic demand and threaten the longer-term outlook for the economy, given lost income, prolonged business disruptions and unemployment.
“We have reduced our growth outlook from 5.8 percent in 2021 to 5.3 percent, following the economy’s 9.6-percent contraction in 2020. We highlight weak credit growth as a signal that monetary policy may need to remain accommodative over an extended period time,” it said.
It said that as of March 2021, loans for production and household consumption contracted 3.2 percent and 9.9 percent year-on-year, respectively.
The Monetary Board of the BSP kept the record-low interest rate of 2 percent on expectation that the annual increases in consumer prices would remain manageable in the next two years.
The interest rates on the overnight deposit and lending facilities were also kept at 1.5 percent and 2.5 percent, respectively.
“Latest inflation forecasts indicate that inflation is likely to settle within the target range in 2021 and 2022. Inflation is now projected to track a slightly lower path in 2021 to average near the upper end of the target band, as price pressures on food commodities are abating with improved weather conditions, the impact of Executive Orders No. 128 and 133, s. 2021, and the implementation of direct non-monetary interventions to alleviate supply constraints,” BSP Governor Benjamin Diokno said.
Diokno said the risks to the inflation outlook were also broadly balanced. The Monetary Board said the timely implementation of approved non-monetary measures would be crucial in mitigating further supply-side pressures on meat prices and inflation.
Diokno said while the improved prospects overseas should support the outlook for domestic economic activity, the recent surge in COVID-19 infections and the resulting measures to contain it continued to temper market confidence and pose substantial downside risks to domestic demand.