No change in BSP rates

As widely expected

MANILA, Philippines — As widely expected, the Bangko Sentral ng Pilipinas (BSP) kept interest rates unchanged at a 16-year high as monetary authorities are looking for a more sustained downward trend in inflation.

During its first meeting for 2024, the BSP Monetary Board maintained its target reverse repurchase rate at 6.5 percent, still at its highest level in 16 years or since the 7.5 percent in May 2007.

Interest rates on the overnight deposit and lending facilities are likewise untouched at six percent and seven percent, respectively.

This is the third straight meeting that the BSP kept rates steady.

Similarly, this is the first time that the meeting was scheduled a day before the official announcement as BSP Governor Eli Remolona himself and Finance Secretary and Monetary Board member Ralph Recto were not available.

This is because of the wedding of celebrities Luis Manzano and Jessy Mendiola. Manzano is Recto’s stepson while Mendiola is Remolona’s niece.

BSP Senior Assistant Governor Iluminada Sicat said risks to the inflation outlook have receded, but remain tilted toward the upside.

As such, the BSP lowered its inflation forecast for this year to 4.2 percent from 3.9 percent previously. This follows a sharp drop in the headline rate to a 36-month low of just 2.8 percent last month.

“Risk to inflation remains tilted to the upside. While we have seen some improvements already, we are keeping our prudent monetary policy stance at this moment,” Sicat said.

These risks are due to higher transport charges, increased electricity rates, elevated oil and domestic food prices, and the additional impact on food prices of a strong El Niño episode.

On the other hand, the implementation of government measures to mitigate the impact of El Niño is the primary downside risk to the outlook.

BSP director Dennis Lapid said the downward revision of inflation came from the lower- than-expected inflation in December and January, appreciation of the peso, lower path for global crude oil prices, and stronger domestic growth output.

Still, Sicat said there should be a firmer indication that the inflation trend would be back to the target range of two to four percent.

“There will be easing of inflation in the first quarter mostly because of base effects but there will be an uptick beyond the inflation range in the second quarter before reverting to the target in the second half,” Sicat said.

The BSP official said that a rate cut can only be considered if the probability of risks will decline as well.

As to the possibility of a rate cut, Sicat said that the BSP’s monetary decision would give far more weight on domestic events rather than what other monetary authorities in advanced economies would take.

This is in reference to the BSP likely moving in lockstep with the US Federal Reserve.

“Inflation has improved and provided some scope to have some policy adjustment faster than other advanced economies are undertaking, but the timing of adjusting policy rates is optimal at the moment,” Sicat said.

“It’s really difficult to say at the moment because we are facing different challenges. Like our inflation is emanating more from the supply side than the demand side. We have to evaluate all the things before we take any policy action,” she said.

Capital Economics senior Asia economist Gareth Leather said the BSP may start cutting interest rates by May as inflation would likely stay low and headwinds to the economic recovery mount.

BSP is projected to lower borrowing costs by as much as 200 basis points until next year.

“Although GDP growth held up surprisingly well last quarter, we don’t expect this to last, with a combination of high interest rates, weak exports and tighter fiscal policy all set to weigh on growth,” Leather said.

Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco, for his part, said that the headline inflation rate looks set to remain comfortably below the mid-point of the target range for most, if not all, of the year.

“We think it can afford to be much more ambitious than this in its next forecast review,” Chanco said.

Pantheon is expecting that inflation will stand at 2.8 percent for 2024, with the first rate reduction likely to come in May as well.