THE Bangko Sentral ng Pilipinas (BSP) will have to rethink its monetary-policy direction in their upcoming monetary-policy setting meeting two weeks from now, as the ongoing development on the coronavirus disease 2019 (COVID-19) is likely to ease inflationary pressures but pull down growth prospects in the coming months.
In his statement following the Philippine Statistics Authority’s (PSA) announcement that inflation eased to 2.6 percent in February, BSP Governor Benjamin Diokno said the virus outbreak is one of the key risks they are looking at in the economy right now.
“The risks to the inflation outlook are expected to be weighted to the upside for 2020, but are seen as tilted toward the downside in 2021. Adjustments in utility rates, petitions for transport fare hikes, and the impact of African swine fever [ASF] on meat prices are the main upside risks to inflation,” Diokno said. “The ongoing spread of COVID-19 could have an adverse impact on domestic economic activity and financial market sentiment in the coming months.”
“The BSP will consider all the latest developments in the Monetary Board’s monetary-policy meeting on 19 March 2020.
The BSP will ensure that the monetary stance remains consistent with its primary objective of maintaining price stability that is conducive to balanced and sustainable growth of the economy,” he added.
More economists believe that the recent global issues, including COVID-19, will open the door for a monetary-policy easing as early as the BSP’s March meeting this year.
ING Bank Manila senior economist Nicholas Mapa told the BusinessMirror that although Diokno’s comments regarding the efficiency of fiscal spending indicate that he will wait for May before cutting rates, he expects the governor to “remain open to easing in March.”
“The world’s most strategic user of oil, China, has dropped out of the market with factories shuttered as workers remain at home, forcing crude oil prices to drop, dragging global inflation expectations with it. Curtailed air travel and limited movement of people and services across the globe also means less money is changing hands which translates to lower incomes on a global scale, which should depress demand further,” Mapa said. “Meanwhile, financial markets have also been ‘infected’ with risk aversion dominating trading, save for bouts of rallying whenever governments or central banks pledge some form of stimulus.”
Dampened growth
In turn, the economist said COVID will likely have a downward pressure on commodity prices in the country but will also have a negative effect on local and global growth prospects.
In their February meeting, the BSP already cut the interest rate on the BSP’s overnight reverse repurchase (RRP) facility by 25 basis points to 3.75 percent amid geopolitical tensions, as well as the then emerging threat of the virus.
Economists at JP Morgan also revised their view of the BSP rate cut pattern for 2020, adding another 25-basis-point cut at the March 19 monetary policy meeting. This brings their forecast interest rate to 3.25 percent by the end of 2020.
The Philippines is not alone, though. Similarly, JP Morgan revised the monetary policy direction of five other Asian economies to a more accommodative stance as well, reacting both to the virus outbreak as well as the Federal Open Market Committee’s rate cut direction.
For China, JP Morgan added another 10 basis points in its forecast rate cut in March. The bank also added another 25-basis-point cut to their projection in Indonesia and South Korea while seeing earlier-than-expected rate cuts in India and Thailand.
“The monetary easing complements the fiscal accommodation that we anticipate will amount to 0.4 percentage points of gross domestic product [GDP] in Emerging Markets [EM] Asia that comes on the heels of downward growth revisions in China and EM Asia due to COVID-19,” JP Morgan said.
Image credits: Nonie Reyes