‘Too early to talk about rate cuts’

MANILA, Philippines — It is still too early to talk about rate cuts even after the Bangko Sentral ng Pilipinas (BSP) ended its year-long tightening cycle with a prudent pause last Thursday, monetary officials said.

In an interview with Bloomberg TV, BSP Governor Felipe Medalla said the downtrend in inflation and the stronger-than-expected economic expansion in the first quarter lowered the odds for additional rate hikes.

Inflation cooled to an eight-month low of 6.6 percent in April, bringing the average to 7.9 percent in the first four months of the year – still above the BSP’s two to four percent target range.

However, core inflation, which excludes volatile food and energy prices, remained elevated, averaging 7.8 percent during the four-month period despite easing to 7.9 percent in April.

Medalla said inflation is seen easing to within the two to four percent target as early as September this year. The central bank lowered its inflation forecasts to 5.5 percent from six percent for this year and to 2.8 percent from 2.9 percent for next year.

Likewise, the economy remained robust with gross domestic product (GDP) growing by a higher-than-expected 6.4 percent in the first quarter, but slower than the 7.1 percent and eight percent pace in the fourth and first quarter of last year, respectively.

According to the BSP chief, GDP is likely to expand by six percent or higher this year – still slower than last year’s 7.6 percent, but well within the six to seven percent target set by the Cabinet-level Development Budget Coordination Committee.

“Right now the economy is strong… That is why pressure on us to cut is not as high,” Medalla said.

On Thursday, the BSP’s Monetary Board decided to keep the policy rates at its current level over the near term, ending nine rate-setting meetings with a cumulative hike of 425 percent, as ongoing price pressures continue to warrant close monitoring.

Medalla said the central bank could maintain a prudent pause by keeping key policy rates steady in the next two to three policy meetings, but hinted it could lower the reserve requirement ratio by 200 basis points as early as June.

He said the BSP is likely to cut rates as soon as the US Federal Reserve shifts to an accommodative stance as it is necessary to maintain a healthy interest rate differential of between 100 and 125 basis points to stabilize the peso.

However, Medalla said the markets are too optimistic about a rate cut by the Fed.He believes this move could happen only next year as the Fed is committed to slow inflation.

“If I were in their shoes, I will be reluctant to cut,” the BSP chief said.

He said the central bank still participates in the foreign exchange market by buying or selling US dollars, but not as much as last year when the peso slumped to an all-time low of 59 to $1 in October.

Jun Neri, lead economist at Ayala-led Bank of the Philippine Islands, said it would be premature to expect rate cuts later this year amid strong demand as well as the projected El Niño in the second half of the year, which could exacerbate supply problems.

“Core inflation remaining sticky near eight percent suggests that the gap between demand and supply remains wide. Aside from this, it seems the economy doesn’t need additional stimulus at this time given the recent GDP data. Economic growth remains healthy at around six percent despite high inflation and the increase in interest rates,” Neri said.

He said bringing inflation back to the target of the BSP is a growth stimulus in itself, making the stimulus provided by rate cuts unnecessary at this point.

“It is also uncertain if the Federal Reserve is done with its hiking cycle. Inflation is still very far from the central bank’s two percent target with the unemployment rate at record low. Additional tightening on the part of the Fed is still within the realms of possibility,” Neri said.

The BPI economist added that the peso is very sensitive to US monetary policy and cutting interest rates at this time might be premature leading to volatility in the foreign exchange market.

HSBC economist for ASEAN Aris Dacanay said they now expect the BSP to keep the benchmark interest rate steady at 6.25 percent for the rest of the year.

HSBC was earlier expecting another 25-basis point increase that would bring the overnight reverse repurchase rate to 6.50 percent from an all-time low of two percent.

It also expects the Monetary Board to cut interest rates by 25 basis points in the third quarter of next year and by another 25 basis points in the fourth quarter of 2024.

Economists Euben Paraceulles and Rangga Cipta of Japan-based Nomura said the BSP is likely to maintain a pause until early 2024 as inflation would remain on a downtrend barring any shocks.

“Beyond this, we believe BSP will only start cutting its policy rates in March 2024, when our US economics team also expects the Fed to start easing.”

UK-based think tank Pantheon Macroeconomics, on the other hand, said the BSP may start to cut rates by the fourth quarter of the year after leaving rates unchanged last Thursday.

“We’re confident that the pause will stick until Q3 (third quarter), and maintain that the BSP will start easing in Q4 (fourth quarter), when we expect 50bp (basis points) in cuts, barring an inflation shock,” Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said in a report yesterday.

Chanco said the think tank expects the Fed to start cutting rates in September, which should give the BSP the green light to follow suit in the fourth quarter.

“We see the first Fed cut in September, in view of weakening growth, a durable downshift in core inflation, and moderating wage growth,” he said.

He also said there is a good chance the country’s inflation could return to the BSP’s two to four percent target earlier than the fourth quarter.

“This is just a touch above the 5.4 percent projection we’ve held since February, which arguably now faces more risks to the downside, given the downturn in food price pressures at the margin and the more benign outlook in global oil prices,” Chanco said. — Louella Desideri