By Keisha B. Ta-asan, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) is widely expected to keep its policy rate at a 16-year high for a third straight meeting on Thursday amid upside risks to inflation and as economic growth remains robust, analysts said.
The Monetary Board is also not expected to cut borrowing costs ahead of the US Federal Reserve as a narrower interest rate differential with the US could cause the peso to weaken further, they said.
A BusinessWorld poll of 17 analysts held last week showed 15 analysts expect the Monetary Board to maintain its target reverse repurchase (RRP) rate at a 16-year high of 6.5% at its review this week. The BSP has kept its key rate at this level for two straight meetings since November.
On the other hand, two analysts said the BSP may cut the policy rate by 25 basis points (bps) to 6.25% at the Feb. 15 meeting after inflation slowed in January.
“We expect the BSP to remain on hold at its next meeting. Although inflation slowed to a more than three-year low of 2.8% in January, this is largely due to base effects,” Makoto Tsuchiya, an economist from Oxford Economics, said in an e-mail.
Headline inflation fell to 2.8% in January from 3.9% in December and 8.7% in the same month a year ago, marking the slowest print since the 2.3% in October 2020.
January was also the second straight month that inflation was within the BSP’s 2-4% target range. The consumer price index for the month was below the 3.1% median estimate in a BusinessWorld poll.
Finance Secretary and Monetary Board member Ralph G. Recto told reporters on the sidelines of an event on Thursday that the BSP may not deliver any more rate hikes this year amid slowing inflation.
“Inflation is on its way down. Assuming it continues to go down and is within the (2-4%) range, then realistically, what will happen next is the lowering of interest rates,” he said in mixed English and Filipino.
However, Philippine National Bank (PNB) economist Alvin Joseph A. Arogo said inflation may still pick up in the coming months, which could give the BSP a reason to keep rates elevated for now.
“Although headline inflation was within the 2-4% target range during the past two months, we think that the risk of a transient re-acceleration is material enough due to the threats from El Niño, Middle East conflict escalation, and lagged impact of minimum wage hikes,” he said.
Colegio de San Juan de Letran Graduate School Associate Professor Emmanuel J. Lopez likewise said the inflation outlook remains uncertain as the agriculture sector has started to feel the effects of El Niño.
Oil price hikes may also lead to higher transport costs of delivering goods and food products, he said.
Meanwhile, Pantheon Chief Emerging Asia Economist Miguel Chanco said the BSP has room to remain hawkish as fourth-quarter gross domestic product (GDP) data showed the Philippine economy is still robust.
“I think the surface-level strength portrayed by the fourth-quarter GDP numbers will, for now, reduce any urgency on the part of the Board to start loosening policy,” he said.
“The BSP is unlikely to trim its policy rate sooner than markets expect given the resilience in household spending seen in the fourth-quarter GDP reading,” Sarah Tan, an economist from Moody’s Analytics, said.
The Philippine economy grew by 5.6% in 2023, slower than the 7.6% expansion in 2022 and falling below the government’s 6-7% full-year target.
In the fourth quarter alone, GDP expanded by 5.6%, slower than the revised 6% growth in the third quarter and the 7.1% expansion in the fourth quarter of 2022.
Household spending jumped by 5.3% in the fourth quarter, bringing private consumption growth to 5.6% in 2023. This is slower than 8.3% in 2022.
Even as GDP growth slowed in 2023, key labor market indicators such as unemployment rates still indicate economic resilience, PNB’s Mr. Arogo noted.
“We therefore think that the BSP should be patient and only start cutting policy rates in the fourth quarter. Our baseline view is for the RRP rate to ease to 6% by the end of 2024,” he said.
Weaker demand due to the lagged impact of previous rate hikes and a global economic slowdown may result in Philippine GDP growth slowing further to 5.2% this year, Oxford Economics’ Mr. Tsuchiya said, which could cause the BSP to “resort to monetary easing to prop up the economy.”
“For the whole year, we think the BSP will cut its rate by 125 bps in total, bringing the rate to 5.25% at yearend,” he said, adding that inflation may average 3.5% in 2024, barring unexpected supply-side shocks.
WAITING FOR FED CUTSAccording to Mr. Recto, the Monetary Board will consider the Fed’s policy moves in deciding when to begin easing benchmark interest rates.
“Are they going to start reducing rates? If they do, then possibly we can start reducing rates,” he said. “I think the Fed needs to (cut policy rates) first then we look at our own data… We’re affected by what the Fed does as well.”
The US central bank raised the fed funds rate by a total of 525 bps from March 2022 to July 2023 to the 5.25%-5.5% range. Markets expect the Fed to begin cutting borrowing costs by May.
“We see the BSP moving via rate cuts as soon as the Fed cuts policy rates. Given the ING house call for (Fed) rate cuts by May or June, we see the BSP cutting rates beginning June,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.
Security Bank Corp. Chief Economist Robert Dan J. Roces likewise said the BSP is unlikely to ease before the Fed given the peso’s recent depreciation against the dollar.
“The local policy rate is projected to decrease to 5.5% by the end of 2024, in cautious increments of 25 bps to total 100 bps — likely matching a similar-sized move by the Fed — and to provide support to economic activity through lower borrowing costs,” he said.
The peso closed at P55.911 a dollar on Thursday, 3.9 centavos stronger from its P55.95 close on Wednesday. Year to date, the peso was weaker by 54.1 centavos from its P55.37-per-dollar finish on Dec. 29, 2023.
ING’s Mr. Mapa noted that if the BSP’s risk-adjusted inflation forecast moves closer to the baseline, they may start reducing borrowing costs to help boost private investments.
The BSP sees headline inflation averaging 3.7% this year, slower than the 6% print in 2023, and easing further to 3.2% in 2025.
Meanwhile, the central bank’s risk-adjusted forecasts show that inflation could settle at 4.2% this year, above the 2-4% target, and slow to 3.4% in 2025.
“For the year we see 75 bps worth of rate cuts as [BSP Governor Eli M. Remolona, Jr.] finally shifts to a more dovish tone,” Mr. Mapa said.
“We all know that the growth engine of the Philippine economy is consumption. However, if economic managers are keen on reversing and compensating for years of underinvestment, they will need to consider giving growth another leg up via more accommodative monetary policy,” he said.
Moody’s Analytics’ Ms. Tan said the BSP may keep benchmark interest rates on hold until June, as inflation could still pick up due to El Niño and fading base effects.
“A series of rate cuts is expected to begin from June at the earliest, when inflation is firmly within the BSP’s 2% to 4% target range. We see a cumulative 100 basis points in cuts by the end of the year,” she said. — with a report from Luisa Maria Jacinta C. Jocson