BSP done with hiking cycle – economists

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is possibly done with its hiking cycle as inflation eased sharply for the second straight month to a 20-month low of 4.1 percent in November, according to economists.

ING Bank senior economist Nicholas Mapa said the stark drop in headline inflation last month highlighted the effectiveness of supply-side remedies to supply-side shocks.

“More signs suggest that (the) BSP is done hiking,” Mapa said.

Aris Dacanay, economist for ASEAN at HSBC, said headline inflation may fall within the BSP’s two to four percent target range this month.

“Inflation softening was broad-based; we expect headline CPI to fall to within the BSP’s two to four percent target band in December, barring any supply-side shock,” Dacanay said.

Headline inflation has stayed above the central bank’s target over the past 20 months. It last fell within the target range at four percent in March 2020.

Likewise, core inflation decelerated to 4.7 percent in November from 5.3 percent in October.

“Headline CPI (consumer price index) continues to tread down. This is great news given how broad-based the deceleration was for November – food and core CPI both decelerated year-on-year while energy inflation was negative,” Dacanay noted.

Dacanay expects the trend to continue, with base effects quite favorable in the next three months and with food supply conditions more ample than last year.

The British banking giant believes the consistent downtrend should provide the BSP leeway to pause in the last Monetary Board meeting for the year scheduled on Dec. 14.

Dacanay said rate cuts are not on the table for now as the BSP would only start reducing interest rates after the US Federal Reserve.

“We continue to expect the BSP to stay pat for longer based on inflation – more so with the need to mind the gap between the Fed and the BSP policy rates to help support the PHP. We only expect the BSP to begin its easing cycle right after the Fed does its first rate cut. Our baseline view is for the Fed to do its first policy rate cut in the third quarter of 2024,” Dacanay added.

Jun Neri, lead economist at Bank of the Philippine Islands, said the possibility of inflation falling below four percent this month is substantial.

“Assuming the absence of major supply shocks, inflation may even reach three percent in the first three months of 2024. However, it could potentially rebound to four percent or higher in the second quarter, especially if the impact of El Nino is worse than expected. Rice prices are likely to remain the primary factor contributing to inflation in the near future,” Neri said.

The Ayala-led bank adjusted its full-year inflation forecast to six percent in 2023 and 3.7 percent in 2024 given the latest data.

“It might be premature to expect rate cuts in the near future despite the improving outlook for inflation. The BSP might need to keep interest rates elevated for most of next year especially given the possibility of an inflation rebound in the 2nd quarter of 2024. Moreover, the rate cuts will also depend on what the Federal Reserve will do,” Neri added.

Meanwhile, the BSP said the latest inflation outturn is consistent with its projections that inflation would likely moderate over the near term due to easing supply-side price pressures and negative base effects.

However, it said the balance of risks to the inflation outlook still leans significantly toward the upside. Key upside risks are associated with the potential impact of higher transport charges, electricity rates, and international oil prices, as well as higher-than-expected minimum wage adjustments in areas outside the National Capital Region.