BSP may start easing by Q4

The Bangko Sentral ng Pilipinas (BSP) will likely begin easing by the fourth quarter when inflation is expected to have firmly settled within target, Metropolitan Bank & Trust Co. (Metrobank) said.

“In line with the BSP’s guidance, we forecast domestic headline inflation to peak in July, which in turn would only be observable in early August,” the Metrobank Research and Market Strategy Department said in a note.

The central bank earlier said inflation could temporarily accelerate above the 2-4% target from May to July due to base effects. However, inflation is expected to return to the target after July.

“This supports our view that the BSP will start its easing cycle in the fourth quarter, rather than the third quarter, when inflation expectations have settled well within the BSP’s 2-4% range,” Metrobank said.

The Monetary Board’s next meeting is on June 27, but BSP Governor Eli M. Remolona, Jr. has signaled that policy easing could begin as early as August.

The Monetary Board’s only meeting in the third quarter is scheduled for Aug. 15, followed by two meetings in the fourth quarter (Oct. 17 and Dec. 19).

Metrobank said the central bank would likely keep a sufficiently restrictive policy stance as upside risks to inflation remain.

It cited risks such as “still-elevated food prices and heightened geopolitical risks that could lead to renewed supply shocks.”

Inflation likely accelerated for a fourth straight month to 4% in May, according to the median estimate in a BusinessWorld poll of 16 analysts.

The BSP gave an inflation forecast of 3.7-4.5% for May. Inflation data will be released on June 5.

“We also continue to see the BSP lagging the US Federal Reserve’s own easing cycle, where we expect the first policy rate cut in the September Federal Open Market Committee (FOMC) meeting, which should then support the peso,” Metrobank said.

Mr. Remolona earlier said that while the BSP monitors the Fed’s moves, it does not need to wait for the US central bank to cut rates.

On May 16, the Monetary Board kept its key policy rate steady at a 17-year high of 6.5%. This was the fifth straight meeting that the BSP stood pat since it delivered an off-cycle rate hike of 25 basis points (bps) in October.

From May 2022 to October 2023, the central bank raised borrowing costs by 450 bps.

Meanwhile, Metrobank said it expects the peso to continue to strengthen. 

“We expect the peso to be further supported by a narrowing current account balance driven in turn by improving trade deficit levels and recovering travel exports, accompanied by an expected uptick in business process outsourcing (BPO) revenues and overseas Filipino worker (OFW) remittances in the fourth quarter,” it said.

The BSP expects a current account deficit of USD 6.1 billion by the end of 2024, equivalent to -1.3% of the gross domestic product (GDP).

Metrobank said it sees the peso settling at PHP 56.10 a dollar by yearend.

In May, the peso touched the PHP 58-per-dollar level for the first time in over 18 months.

The BSP has said it would continue to monitor the foreign exchange market and would participate if necessary to “smoothen excessive volatility and restore order during periods of stress.”

On Monday, the peso closed at PHP 58.68 per dollar, weakening by 17 centavos from its PHP 58.51 finish on Friday. This was the worst finish in almost 19 months or since its PHP 58.80-per-dollar close on Nov. 3, 2022. — Luisa Maria Jacinta C. Jocson