BSP may keep rates on hold until next year

MANILA, Philippines — Economists believe the inflation downtrend will give the Bangko Sentral ng Pilipinas (BSP) more space for a longer pause that may see key policy rates on hold until next year.

Aris Dacanay, economist for ASEAN at HSBC, said the further easing of inflation to a 12-month low of 6.1 percent in May from 6.6 percent in April keeps the policy rate outlook unchanged.

“The BSP will likely keep its policy rate at 6.25 percent, not only in the upcoming Monetary Board meeting, but even in the many meetings after. Our baseline view is for the BSP to be on hold until the second half of 2024,” Dacanay said.

After a year-long tightening cycle that started in May last year, which saw a 425-basis-point cumulative hike in key policy rates to tame inflation and stabilize the peso, the BSP   took a prudent pause after it kept interest rates unchanged on May 18.

It also 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.

Inflation averaged 7.5 percent from January to May, still way above the central bank’s two to four percent target range.

Apart from inflationary risks tilted to the upside, Dacanay said the BSP would keep policy rates steady for a prolonged period as monetary authorities are looking into cutting the reserve requirement ratio (RRR) to single digits first before cutting policy rates.

The British banking giant expects the Monetary Board to reduce the level of deposits banks are required to keep with the central bank by 200 basis points to 10 percent once the pandemic-era policies on required reserves expire on June 30.

Dacanay said the BSP would likely follow the US Federal Reserve by cutting the policy rate only after the Fed cuts its own interest rates.

“Since the Philippine economy is in twin deficits, it is susceptible to abrupt changes in the peso-dollar foreign exchange rate. That said, the central bank will likely be in defensive mode by maintaining an appropriate policy rate buffer above the Fed rate. Our baseline view is for the Fed to only begin cutting rates in 2Q 2024,” Dacanay said.

ING Bank senior economist Nicholas Mapa said moderating inflation leaves the door open for the BSP Monetary Board to pause at its next rate-setting meeting scheduled on June 22.

Mapa said the central bank would monitor developments such as the Federal Open Market Committee (FOMC) meeting ahead of the June 22 meeting of the BSP Monetary Board.

Bank of the Philippine Islands lead economist Jun Neri said the BSP has the flexibility to keep interest rates steady considering the improving outlook for inflation.

“This is the first time in 31 months that the real policy rate is positive. However, we are not counting out the possibility of another hike given the uncertainties surrounding the Federal Reserve,” Neri said.

Neri explained that keeping an appropriate interest rate differential between the US and the Philippines was still important as this could affect the exchange rate.

“With the country becoming more reliant on imports, the depreciation of the peso may prevent inflation from declining faster,” Neri said.

Neri said a policy rate cut is premature at this time, especially considering the possibility of another Fed hike.

“The recent GDP data have shown that demand remains strong and the economy doesn’t need additional stimulus. The more crucial objective now is to ensure that inflation goes back to the BSP’s target. Achieving this is a growth stimulus in itself, making the stimulus provided by rate cuts unnecessary at this point,” he said.