MNI BSP Preview - May 2021: BSP To Hold Fire Amid Stagflation Threat

MNI Point of View:

• The Bangko Sentral ng Pilipinas' policy announcement has been brought forward from Thursday, after the government declared that day a public holiday. Following this calendar tweak, policymakers remain poised to leave interest rates unchanged when they conclude their monetary policy meeting. Elevated consumer-price inflation and tepid bank lending limit potential marginal benefit from loosening policy, even as the Philippines is fighting another wave of coronavirus.
• While inflation was steady at +4.5% Y/Y in April, missing market expectations of a slight acceleration, it still sits above BSP target range of +2.0-4.0% Y/Y. Governor Diokno admitted that CPI is expected to remain elevated through the end of 2021, before moving towards the mid-point of the target range in 2022 as supply-side pressures abate. Nonetheless, loosening policy seems unlikely in the current inflationary environment.
• In his recent address, Governor Diokno signalled that alongside latest CPI data, policymakers will consider Q1 GDP report, released earlier this week. Philippine economy shrank 4.2% Y/Y, falling deeper into contraction than expected by analysts, which cast doubt on the possibility of meeting the government's current growth target for this year.
• Meanwhile, the epidemiological situation remains difficult, even as national vaccine rollout is already got underway. The number of new Covid-19 cases has been falling as the government tightened restrictions in the so called NCR+ bubble, but remains high by historical standards.
• Despite below-forecast pace of recovery and continued spread of the virus, a further reduction of interest rates is unlikely to bring much benefit – and there is more to that than just elevated CPI. The decline in bank lending continued to accelerate in March, reaching a pace not seen in 17 years.
• In light of the current inflationary environment and subdued bank lending, Bangko Sentral ng Pilipinas are likely to leave interest rates unchanged, looking through downbeat Q1 GDP data and the ongoing fight against resurging coronavirus. While Economic Planning Secretary Chua refused to admit that the Philippines has entered stagflation, the BSP are stuck between a rock and a hard place. We expect them to reiterate that accommodative monetary conditions are appropriate to support economic recovery, continue to work on macroprudential measures to improve policy transmission, and let the government address supply-side inflationary pressures.

MNI BSP Preview May 2021.pdf