THE BANGKO SENTRAL ng Pilipinas (BSP) is expected to deliver “fewer and later” rate cuts this year amid persistent price pressures and with the US Federal Reserve expected to push back its own easing cycle, Fitch Solutions’ unit BMI said.
“There could be fewer and later cuts than we currently forecast. As of now, we think that the BSP will cut in the second half, similar to our view for the Fed (US Federal Reserve),” BMI said in a commentary released on Thursday.
“However, if inflation in the US were to surprise to the upside, the Fed would push back the timing of its easing cycle. And the BSP would likely follow suit,” it added.
The Monetary Board kept the target reverse repurchase rate steady at a near 17-year high of 6.5% at its meeting on Monday.
This is the fourth straight meeting that the BSP has kept borrowing costs unchanged since a 25-basis-point (bp) off-cycle rate hike in October that brought cumulative increases since May 2022 to 450 bps.
Meanwhile, the US central bank last month kept the fed funds rate at the 5.25%-5.5% range for a fifth straight meeting after it raised rates by a total of 525 bps from March 2022 to July 2023. Fed officials have signaled that they could cut rates thrice later this year while emphasizing the need to be careful amid lingering risks.
BMI said the BSP will likely keep rates unchanged again at its meeting on May 16.
“Despite the fact that inflation is within the BSP’s targeted range of 2-4%, price pressures have intensified recently,” it said.
BSP Governor Eli M. Remolona, Jr. said the central bank is leaning towards being “somewhat more hawkish” as upside risks to inflation have worsened due to high food and transport prices.
The BSP raised its baseline and risk-adjusted inflation forecasts to 3.8% and 4%, respectively, from 3.6% and 3.9% previously.
Inflation quickened for a second straight month to 3.7% in March from 3.4% in February.
BMI sees 75 bps in rate cuts from the BSP in the second half.
“The bank’s next move will be a cut. But we only expect it to materialize in the second half when other major central banks in the world begin loosening financial conditions,” it said.
Mr. Remolona on Monday said if inflation settles within target and if economic growth is weaker than expected, the Monetary Board can cut rates as early as the third quarter. Otherwise, it could begin easing as late as the first quarter of 2025.
BMI said prices will need to be “more firmly anchored” before the BSP makes its next move.
“We forecast inflation to average 3.9% in 2024. This implies that consumer prices will fluctuate around the 4% mark over the coming months especially as the impact of the El Niño phenomenon continues to feed through,” it added.
Agricultural damage caused by the El Niño dry spell has risen to P2.63 billion, according to the Agriculture department’s latest bulletin. Rice was the most affected crop, accounting for P1.72 billion of total losses.
Rice inflation, which accounts for almost half of overall inflation, accelerated to 24.4% in March or its fastest print since 24.6% in February 2009.
“Sustained resilience in the economy and weakness in the peso mean that the BSP will be in no hurry to loosen monetary policy. Instead, it will continue taking cues from the Fed, and cut rates only when they do so,” BMI said.
“Uncertainty surrounding the interest rate trajectory in the US has led to much volatility in many emerging market currencies. And the peso is no exception. Any preemptive loosening could exacerbate weakness in the peso — something the BSP will be mindful to avoid,” it added.
The peso is currently trading at the P56 level after closing at P55.37 on Dec. 29, 2023. — Luisa Maria Jacinta C. Jocson