BSP likely to extend pause until year-end

Economists say still too early to cut rates

MANILA, Philippines — Economists see a prolonged elevated interest rate environment in the Philippines as the Bangko Sentral ng Pilipinas (BSP) extended its hawkish pause to three straight meetings despite the inflation downtrend and the faltering economic growth.

BMI Country Risk & Industry Research said in a commentary titled “Too Early for Rate Cuts in the Philippines” that rate cuts by the BSP‘s Monetary Board could materialize only in the second quarter of next year.

“Rate cuts would then only be considered when food prices have stabilized and major central banks have begun their easing cycle, which we expect in Q224,” BMI said.

The research arm of the Fitch Group said the onset of El Niño weather conditions from the fourth quarter of this year to the first quarter of next year could threaten food prices, potentially raising concerns of Philippine disinflationary process.

BMI’s commodity team has ranked the Philippines sixth in its Southeast Asia El-Niño Exposure Index.

“With clear risk to the inflation outlook and the external sector under pressure, policymakers will likely keep financial conditions very restrictive for a while longer,” BMI said.

In addition to inflation, BMI pointed out that maintaining currency stability would be a key consideration in the central bank’s near-term policy decisions as the peso depreciated by about 1.9 percent against the greenback in the year-to-date and is currently trending towards its all-time low of 59 to $1.

“Policymakers will be cautious about exacerbating further weakness in the peso, especially given that the US Federal Reserve has not completely closed the door on further tightening – a key risk that we have been highlighting,” it said.

These factors, BMI said would prompt the BSP to keep interest rates at multi-year highs at the expense of growth.

Nalin Chutchotitham, economist for the Philippines at Citi, said monetary authorities are now more hawkish after keeping key policy rates untouched for three straight rate-setting meetings since May.

Last Thursday, the central bank’s Monetary Board raised its inflation forecasts to 5.6 from 5.4 percent for 2023, 3.3 percent from 2.9 percent for 2024 and 3.4 percent from 3.2 percent for 2025.

Chutchotitham said the BSP deemed that balance of risks to inflation forecast remained on the upside, mainly from potential price pressures from higher transport charges and minimum wages, persistent supply constraints on key food items, and El Niño’s effects on food prices and electricity power rates.

The global banking giant sees no change in the policy rate through early 2024 amid the slowdown in the country’s gross domestic product (GDP) growth to 4.3 percent in the second quarter of the year from 6.4 percent in the first quarter.

Chutchotitham said the bulk of the impact of past monetary tightening with a cumulative 425-basis point hike between May 2022 and March 2023 would be felt next year.

“We think the BSP also has the option of delaying its future rate cuts, instead of hiking more, to anchor future inflation expectations,” Chutchotitham said.

ANZ Research has also maintained its 2023 year-end policy rate forecast at 6.25 percent for the benchmark rate as the BSP has kept the door open to resume rate hikes if the need arises.

“On our part, we are maintaining our 2023 year-end policy rate forecast at 6.25 percent for now. However, we will continue to monitor the El Niño and global oil price developments to evaluate domestic inflation risks and the path of monetary policy, by implication,” ANZ chief economist Sanjay Mathur and economist Debalika Sarkar said.

On the other hand, UK-based think tank Pantheon Macroeconomics said the central bank may start the gradual rollback of interest rates as early as the fourth quarter amid the challenging outlook for economic growth.

“The BSP is sounding more worried about growth, strengthening our call for rate cuts in the fourth quarter,” Pantheon’s chief emerging Asia economist Miguel Chanco and senior Asia economist Moorthy Krshnan said in a report.

Going forward, the Monetary Board said economic activity is likely to moderate as pent-up demand fades and the full impact of prior monetary policy tightening is felt.

While the Monetary Board cited how fiscal impulse through programmed spending could support the growth momentum, Chanco and Krshnan said this is wishful thinking.

“We maintain that the BSP will be compelled to start easing in the fourth quarter – sooner than expected by the prevailing wisdom – with 50-basis-point worth of cuts by year-end still our base case,” they said.