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Further rate cut seen needed in second half if economic recovery stalls 

A SLOWER economic recovery resulting from the return to restrictive lockdowns could drive the Bangko Sentral ng Pilipinas (BSP) to cut policy rates once more in the second half, First Metro Investment Corp. (FMIC) and University of Asia and the Pacific (UA&P) said Wednesday.

“With still a weak economy, BSP will likely keep policy rates unchanged in H1, unless the new ECQ (enhanced community quarantine) significantly slows the economy further, which may merit a rate cut,” FMIC and UA&P said in their March edition of The Market Call.

They said one major factor that prevents the central bank from bringing down benchmark interest rates further is high inflation, which exceeded the official 2-4% target band in February with a reading of 4.7%. It projected inflation to have risen to 4.9% in March, before tapering off starting April.

“The BSP holds the position that the current upticks will prove transitory and inflation will moderate significantly in H2,” it said. 

In its second policy-setting meeting, the Monetary Board maintained the overnight reverse repurchase rate at a record low of 2%. Rates for the overnight lending and deposit facilities were also maintained at 2.5% and 1.5%, respectively.

Metro Manila, Bulacan, Cavite, Laguna and Rizal have been placed under the strictest form of lockdown for the week to April 4 in a bid to curb the resurgence of coronavirus cases.

The Health department reported 9,296 new infections Tuesday, bringing the total number to 741,181. Deaths have totaled 13,191 so far.

FMIC and UA&P said the pace of the economic recovery will depend on how well the government executes its vaccination rollout. A successful program is expected to boost the confidence of investors, businesses and consumers.

It said consumer spending, which is equivalent to 70% of economic output, will remain dampened over the near term as localized lockdowns are implemented. However, this indicator will pick up once households start shopping more freely once the daily case count falls.

It said government spending — which is also a major growth driver — should have also gained traction in February as agencies start spending their 2021 budgets.

The Bureau of the Treasury estimates that government spending rose 37% from a year earlier to P335.5 billion in February, bringing the two-month expenditure total to P610 billion, up 18%. 

Economic managers have set a 6.5-7.5% growth target for this year, following 2020’s record 9.5% contraction. — Beatrice M. Laforga

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