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Oxford Economics sees PH interest rates staying low until 2023

The Philippines’ record-low 2-percent policy rate is expected to linger until early 2023 to buoy economic recovery despite transitory inflation pressures, the UK-based think tank Oxford Economics said on Wednesday (Nov. 17).

“We concur with the central bank’s view that the current rise in inflation in the Philippines is for the most part transitory, reflecting supply-side pressures,” said Makoto Tsuchiya, Oxford Economics Philippines economist, in a report referring to the Bangko Sentral ng Pilipinas (BSP).

“As such, we expect the BSP to maintain rates at their current levels until the first quarter of 2023 to provide support for the economy,” the report said.

Tsuchiya said Oxford Economics’ projections showed that “economic recovery will be on a firmer footing” in early 2023.

However, Tsuchiya said the forthcoming US Federal Reserve tapering, or unwinding of economic stimulus like bond purchases, “may force the BSP to hike rates earlier than the fundamentals warrant, in order to prevent a sharp depreciation of the Philippine peso and prolonged inflation.”

As of end-October, headline inflation averaged 4.5 percent, above the BSP’s 2 to 4 percent target band of manageable prices hikes, mainly due to expensive food, especially pork. The BSP expects the rate of increase in prices of basic commodities to return within the target range next year.

Tsuchiya said he broke down the basket of goods comprising the Philippines’ consumer price index (CPI) into four categories: imported, persistent, procyclical, and transitory.

“Based on our analysis which groups CPI components into categories based on their traits, current high inflation is largely due to transitory and supply side-driven forces, and therefore is unlikely to lead to a prolonged inflationary spiral or force the BSP into raising rates early,” Tsuchiya said.

For instance, food prices, which accounted for two-fifths of the CPI, were “vulnerable to supply shocks, including weather-related disruptions, and therefore most food inflation is categorized as transitory,” he said.

“The imported category is also sizable as the Philippines is a net importer of oil, meaning domestic energy prices react strongly to global factors, as is currently the case,” Tsuchiya said.

“In contrast, procyclical and persistent groups are less dynamic due to their relatively small weights and the generally slow-moving nature of their components,” he added.

Tsuchiya mostly blamed the current elevated inflation episode to transitory price increases, specifically of fish and vegetable prices due to recent bad weather. “We expect those prices to come down in the coming months, as we are already past peak typhoon season,” he said.

Imported inflation also drove faster price hikes in domestic oil and pork prices, Tsuchiya said.

“Global fuel prices remain high due to demand-supply imbalances, and we expect inflationary pressures on this front to persist into early 2022 before gradually fading,” he said.

As for pork, whose prices soared since late 2020 due to the African swine fever (ASF) outbreak, Tsuchiya said the year-on-year price “distortion” was expected to fade during the coming months when base effects unwind.

“While the imported inflation category is highly exposed to fluctuations in the exchange rate, our forecast of modest but stronger peso into 2022 means exchange-rate risks are limited, and imported inflation will gradually ease next year as supply-side issues are resolved,” Tsuchiya said.

On the two other categories, persistent and procyclical, Tsuchiya said inflationary pressures for both remained “subdued.”

“The persistent category is comprised of relatively slow-moving prices, such as less volatile food prices, medical services, and passenger transport,” Tsuchiya said.

“While consumer transportation prices rose last year due to pandemic-related limitations, transportation inflation has come back down to earth. We expect persistent inflation to hover around its historical trend level.” he said.

“While the procyclical category is considered to better reflect domestic demand conditions compared to other categories, there is a limited pass-through due to the presence in the Philippines of a binding minimum wage which maintains the procyclical inflation at a stable level,” he added.

Most economists, including Tsuchiya, expect the BSP to keep key interest rates steady when the Monetary Board decides on the monetary policy stance on Thursday (Nov. 18).

“The Monetary Board likely will hold the overnight reverse repo rate at 2 percent,” said Miguel Chanco, Pantheon Macroeconomics senior Asia economist.

“Normalization is unlikely to surface on the BSP’s radar anytime soon, despite the punchy third-quarter GDP. All signs point to the recovery cooling in 2022,” Chanco said, referring to the better-than-expected 7.1-percent year-on-year economic growth between July and September.

“We believe the BSP is likely to keep its policy rate unchanged to support economic growth,” said HSBC Global Research, another think tank.

“Despite the fact that third-quarter GDP surprised the market on the upside, showing resilience in economic activity amid the lockdown in Metro Manilla, there are still headwinds to a recovery given the relatively slower vaccination progress,” it said.

“Meanwhile, although inflation moderated in October, it remained above BSP’s target for the third-straight month. We believe this higher inflation is likely transitory and that the BSP is not likely to change its policy rate this year,” HSBC Global Research added.

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