Fitch Group unit: Expect interest rate cuts in 2024

MANILA, Philippines — The Bangko Sentral ng Pilipinas’ extended pause is expected to remain till the end of the year, with rate cuts projected in 2024, so says a unit of Fitch Group.

In an emailed commentary on Monday, BMI hinged this outlook on inflation keeping its current pace of deceleration. 

“Given that inflation is falling faster than what we originally anticipated, economic activity is starting to soften and the US Fed is nearing the end of its tightening cycle, we now think that policy rates will be kept on hold for the remainder of the year, and only be cut in 2024,” the commentary read.

Inflation skyrocketed towards the end of 2022 to 14-year highs, as its ascent was fueled by supply chain bottlenecks, the peso’s weakness, and the domestic economy’s reopening that led to an explosion in consumer spending.

Consumer price growth slowed in past months, as the BSP’s aggressive rate hikes made its way around the economy.

Even then, the unit of Fitch Group noted that the central bank is inclined to interest rates untouched in its next policy meeting in February. 

Interest rates stood at 6.25%, after the Monetary Board held off from tweaking borrowing costs in its previous meeting in June.

The BSP injected 425 basis points into the benchmark lending rate since May last year as it began tightening. That meant shifting from an accomodative monetary policy, one that saw interest rates slashed by 200 bps in November 2020 to encourage credit growth.

This shift meant that borrowing costs would turn expensive, far from the 2% maintained over the course of pandemic lockdowns in the Philippines. After all, banks and financial institutions use the policy rate as benchmark when they hand out loans.

To support this projection, BMI pointed out that any cuts to interest rates could leave the local unit vulnerable. 

“Despite our view for interest rates to remain on hold over the near term, we do not expect any cuts in 2023 as the peso remains susceptible to further weakness especially if the central bank were to loosen monetary policy prematurely,” the commentary noted. 

BSP Governor Felipe Medalla already warned that reducing interest rates too soon could prove ill-advised, as opposed to cutting it too late. 

The risks on inflation trending upward remain at bay, according to BMI. 

Any rate hikes undertaken by the US Federal Reserve could strain the peso’s position. The BSP convened an emergency policy meeting in July 2022, to raise interest rates that matched the Fed’s actions.

Likewise, the risk of El Niño remains. Economic managers hinted that the impact of this dry spell could be softer since they left growth targets unmoved in April. But past occurrences of El Niño strained agricultural production in the country. — Ramon Royandoyan