Interest rates to remain high in Philippines

MANILA, Philippines — Economists of foreign banks expect a prolonged high interest rate regime in the Philippines, as they ruled out possible rate cuts by the Bangko Sentral ng Pilipinas (BSP) this year due to upside inflationary risks.

Nalin Chutchotitham, economist for the Philippines and Thailand at Citi, said the BSP is likely to maintain its key policy rates through early 2024.

“We continue to expect no rate cuts in 2023, given the remaining upside risks to inflation and the still weak current account and basic balance outlook,” Chutchotitham said.

The BSP maintains a cautious tone about remaining upside inflationary risks due to the impending increases in transport fares and minimum wages as well as the effects of El Niño in the months ahead.

In June 22, the BSP said the balance of risks to the inflation outlook remain on the upside due to the potential impact of transport fare and minimum wage increases, ongoing supply constraints of key food items, potential El Niño effects, and possible knock-on effects of higher toll rates on agricultural prices.

Chutchotitham cited the impending fare increase for the Light Rail Transit (LRT) as well as the toll hike for the North Luzon Expressway (NLEX) that could raise costs for goods, particularly agriculture products.

Meanwhile, the BSP sees weaker-than-expected global economic recovery as the primary source of downside risk to inflation outlook.

Chutchotitham said further hikes are unlikely, even though the BSP said that it is ready to resume monetary tightening as necessary.

During its year-long tightening cycle, the central bank raised key policy rates by a cumulative 425 basis points since it started its interest rate liftoff in May last year to tame inflation and stabilize the peso.

This brought the overnight reverse repurchase rate to an all-time high of 6.25 percent from an all-time low of two percent.

HSBC economist for ASEAN Aris Dacanay said the BSP is likely to keep its key policy rates anew, even if the US Federal Reserve decides to deliver a 25-basis-point hike in its next rate-setting meeting.

“We still expect the BSP to keep the policy rate steady at 6.25 percent until the third quarter of 2024. In the near-term, we expect the BSP to stand pat even if the US Fed raises its policy rate by 25 basis points to 5.25 to 5.50 percent in July, narrowing the yield differential between the BSP and the Fed rates to 75 to 100 basis points,” Dacanay said.

Dacanay said there is less pressure for the BSP to maintain the current policy rate differential since the dollar is already less strong than before.

According to Dacanay, the BSP has been able to raise its foreign exchange reserves since the fourth quarter of last year, thus adding to its capability to stabilize the peso as needed.

However, Dacanay said the central bank maintained its hawkish stance for defensive purposes as risks to the policy rate outlook remain tilted to the upside with core inflation still very elevated.

ANZ chief economist Sanjay Mathur and economist Debalika Sarkar said that the need for further rate hikes has decreased.

“Even if the US Fed continues to hike for a longer period, as long as that does not contribute to dollar strength, the development of domestic conditions will be prioritized in the BSP’s monetary policy decisions,” Mathur and Sarkar said.

ANZ sees the BSP keeping interest rates on hold until the first quarter of next year.

ING Bank senior economist Nicholas Mapa said the BSP is likely to extend its prudent pause after keeping policy rates on hold for two rate-setting meetings in May and June.

“We could see the BSP on hold for a couple of more meetings if inflation continues to moderate and head closer to target. The BSP expects inflation to settle within its target band as early as September, although the central bank did indicate that risks to the inflation outlook remain tilted to the upside,” Mapa said.

The Dutch financial giant believes that a looming bout with El Niño could force food prices higher, and thus the BSP has left the door open for further tightening if warranted.