Monetary easing seen on hold until 2022

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) will likely keep rates on hold until next year as real interest rates in the country are already in negative territory, an international think tank said.

In a new Asia Pacific research brief, UK-based Oxford Economics said that in countries like India and the Philippines, negative real interest rates prevail as monetary authorities keep rates at record lows to support their pandemic-battered economies.

“The real policy rate is currently negative in India and the Philippines, and so we don’t expect any more rate cuts in 2021-2022,” said Oxford Economics.

The BSP kept interest rates steady at a record low after a spike in food prices caused inflation to surge to a two-year high of 4.2 percent in January, breaching the upper end of its target.

The overnight reverse repurchase facility, used by banks to price their loans, was unchanged at two percent.

Meanwhile, the overnight lending rate was still at 2.5 percent and the overnight deposit rate at 1.5 percent.

Bank economists have said the prevailing negative rates may make it more challenging for monetary authorities to ease policy rates, with some even saying that the central bank may tolerate negative policy rates for the time being to enable the economy to have a significant recovery.

Prevailing negative rates stemmed from the BSP’s fast and aggressive action in the wake of the pandemic in an effort to restore business confidence and arrest further economic fallout from the crisis.

At the same time, inflation rose toward the end of the year owing to fast rising food and transportation prices, the effect of weather disturbances, and limitations on transport capacity amid lockdown.

As real interest rates stay in negative territory, banks may opt to lend more for consumption and investment instead of keeping cash at the central bank.

But with incomes still depressed and banks becoming more selective in lending due to a rise in bad loans, credit growth remained sluggish.

This prompted some market observers to call for more fiscal stimulus and monetary policy actions other than policy rate cuts.