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BSP holds rates amid Omicron threat

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By Luz Wendy T. Noble, Reporter

THE Philippine central bank maintained its key policy rates at record lows as widely expected on Thursday to lend support to the economy amid the threat from the Omicron variant of the coronavirus disease 2019 (COVID-19).

The Bangko Sentral ng Pilipinas (BSP) kept the overnight reverse repurchase rate at 2%, as expected by all 15 economists in a BusinessWorld poll last week. The overnight deposit and lending rates at all-time lows of 1.5% and 2.5%, respectively.

“The Monetary Board sees enough scope to keep a patient hand on the BSP’s policy levers owing to a manageable inflation environment,” BSP Governor Benjamin E. Diokno said in an online briefing on Thursday.

Headline inflation in November eased to 4.2% from 4.6%, mainly due to slower increase in food prices.

“At the same time, downside risks to the economic recovery emanate from the emergence of new COVID-19 variants as well as the potential tightening of global financial conditions. Hence, preserving ongoing monetary policy support at this juncture shall help sustain the economy’s momentum over the next few quarters,” Mr. Diokno said.

The Philippines reported on Wednesday its first two cases of the Omicron variant, which the World Health Organization said was spreading faster globally than any previous strain.

“Nonetheless, the Monetary Board observed that economic growth now appears to be on firmer ground, supported by the Government’s accelerated vaccination program and calibrated relaxation of quarantine protocols,” he said.

The economy grew by a better-than-expected 7.1% in the third quarter, despite a Delta-driven surge in infections in August. Year to date, gross domestic product growth is at 4.9%.

Mr. Diokno said improving credit activity is reflective of such economic recovery.

Bank lending rose 3.5% year on year in November, marking the third straight month of annual growth in outstanding loans issued by big banks. Prior to this, bank lending contracted from December to July despite the low interest rate environment.

“The BSP stands ready to respond to potential second-round effects arising from supply-side pressures, in line with its price and financial stability objectives,” the BSP chief said.

Meanwhile, the central bank raised its inflation expectation for this year to 4.4% from 4.3% previously, BSP Deputy Governor Francisco G. Dakila, Jr. said.

“The latest baseline forecasts for 2021 and 2022 are slightly higher from the previous assessment round owing to the higher-than-anticipated inflation outturn in November,” Mr. Diokno said.

November inflation stood at 4.2%, which was a tad faster than the 3.3-4.1% estimate given by the BSP. Inflation in the 11 months to November was at 4.5%.

BSP’s inflation forecast for 2022 was also raised to 3.4% (from 3.3% previously), while the 2023 projection was maintained at 3.2%.

“Upside risks are linked mainly to the potential impact of continuing constraints on the supply of key food items and petitions for transport fare hikes,” Mr. Diokno said.

Lingering supply issues may also push prices of international commodities higher, he added.

Mr. Dakila said faster inflation continues to be driven by supply-side issues.

The looming threat from the Omicron variant has strengthened the case for the central bank to keep its support for economic rebound, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said.

“An important risk to consider is any premature tightening of monetary policy that could jeopardize the fragile economic recovery prospects,” Mr. Ricafort said in a Viber message.

Meanwhile, Security Bank Corp. Chief Economist Robert Dan J. Roces noted how the BSP’s rhetoric has already acknowledged the need to be extra vigilant with data, even when it vowed to stay accommodative. He expects the central bank to consider rate adjustments in the second half of 2022.

“If by the second half of 2022 recovery becomes stable, demand-pull gets more pronounced, and second round effects take hold, then that makes the case for a liftoff,” Mr. Roces said in a Viber message.

The central bank has kept rates untouched since Dec. 17, 2020. Last year, it slashed interest rates by 200 basis points to support the economy during the pandemic.

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