BSP seen keeping rates steady

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is expected to leave interest rates untouched anew as the Monetary Board meets for the last time this year on Thursday.

China Bank chief economist Domini Velasquez said the central bank’s Monetary Board would likely maintain its policy rate unchanged for the second straight rate-setting meeting scheduled on Dec. 14.

“In the last monetary review of the year, we anticipate that the BSP will maintain its policy rate unchanged due to recent indications of cooling inflation, with the impact of supply shocks in August and September quickly dissipating,” Velasquez said.

“However, we expect the BSP to adopt a hawkish stance due to potential upside risks. In the first half of 2024, upward pressure on food prices (particularly rice) caused by El Niño, possible fuel price increases due to OPEC+ production cuts, and higher-than-expected minimum wage hikes are expected,” Velasquez said.

Inflation averaged 6.2 percent from January to November, still well above the BSP’s two to four percent target range. It eased to a 20-month low of 4.1 percent in November from 4.9 percent in October.

“Nevertheless, we project that inflation will average 3.7 percent for 2024, providing room for the BSP to potentially reduce its reserve ratio requirement or policy rate in the second half of the year,” she said.

Alvin Arogo, economist at Philippine National Bank, said the BSP may keep the target reverse repurchase rate unchanged at 6.50 percent mainly because of the slower inflation rate in November.

“Moreover, we think that domestic interest rates are restrictive enough given the general downtrend in fixed capital formation growth. In the absence of severe weather disruptions, there is a fair chance that the headline print could be better than our baseline view and momentarily fall below four percent within the coming three months,” Arogo said.

The Lucio Tan-led bank anticipates price growth to settle sustainably within the BSP’s two to four percent target range starting in the fourth quarter of next year.

“As such, the BSP should only cut rates in the fourth quarter of 2024 (total of 50 basis points, in our view),” Arogo added.

Security Bank chief economist Robert Dan Roces expects another hawkish stance from the Monetary Board on Thursday amid the positive trend in inflation control, while elevated core inflation requires continued vigilance.

“Global economic uncertainties, such as rising interest rates in major economies, and geopolitical events could dampen domestic economic growth. This may incentivize the central bank to adopt a more cautious approach to monetary policy,” Roces said.

He said, the central bank faces a delicate balancing act between maintaining economic growth and controlling inflation.

“A pause in interest rate hikes may encourage investment and economic activity while monitoring the impact on inflation.” Roces said.

The BSP, he said, wants to assess the full effect of previous rate hikes before further adjustments.

Based on the current trends. Roces pointed out that there remains some upside risks to the outlook; core and headline may rise this month as cost-push inflation factors – the main cause of elevated inflation - meets demand-pull from holiday spending.

“Thus, December inflation may slightly be higher on seasonality than November’s, to bring average inflation in 2023 to six percent,” Roces said.

Aris Dacanay, economist for ASEAN at HSBC, said the BSP is likely to keep policy rates steady as inflation is expected to ease to within the target band soon.

“With headline CPI easing quickly to where the BSP wants it to be, the central bank is likely to keep its policy rate steady at the last rate setting meeting of the year on Dec. 14,” Dacanay said.

Even when headline consumer price index (CPI) falling back to within target soon, the British banking giant does not think it would change the BSP’s monetary stance.

“We expect headline CPI to rise again and breach the BSP’s two to four percent target band in the second quarter of 2024 when the tariff rates for rice, corn, coal, and pork increase due to the expiration of Executive Order 10 on Dec. 31. With upside risks to inflation still heavily tilted to the upside, it may still be too early to put rate cuts on the table,” Dacanay said.

HSBC expects the BSP to gradually begin its easing cycle after the US Federal Reserve does its first rate cut in the third quarter next year when headline inflation is softening on a consistent basis.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., sees another pause that would keep the benchmark interest rate steady at 6.50 percent.

Ricafort said inflation is seen easing further to below the BSP’s two to four percent target range at below three percent by January from a little over four percent in December.