BSP extends pause on rate hikes

The Bangko Sentral ng Pilipinas (BSP) maintained key interest rates for a fourth straight meeting on Thursday but signaled it might resume tightening at its next meeting in November if inflation pressures persist.

The Monetary Board kept its target reverse repurchase (RRP) rate at 6.25%, as expected by 14 of 17 analysts at a BusinessWorld poll last week.

Interest rates on the overnight deposit and lending facilities were also left unchanged at 5.75% and 6.75%, respectively.

“The Monetary Board deemed it appropriate to maintain its pause amid the emerging upside risks to the inflation outlook,” BSP Governor Eli M. Remolona, Jr. said in a press briefing. 

“Looking ahead, the BSP stands ready to resume its tightening actions in the face of upside risks and potential second-round effects that could dislodge inflation expectations.”

Mr. Remolona said the Monetary Board might hike borrowing costs at its policy review on Nov. 16 should inflationary pressures persist. 

“A rate hike is on the table in November. How big it will be will depend on the data, (or) how bad the data are with respect to inflation,” he said.

The BSP has raised borrowing costs by 425 basis points (bps) from May 2022 to March 2023 to tame inflation.

New forecast
Meanwhile, the BSP raised its average inflation forecast for 2023 to 5.8% (from 5.6%) and to 3.5% (from 3.3%) for 2024. It kept its 2025 forecast unchanged at 3.4%.

Mr. Remolona said the hike in the inflation projections this year and 2024 reflect “spillovers from weather disturbances, rising global crude oil prices and the recent depreciation of the peso.”

BSP Senior Assistant Governor Iluminada T. Sicat said the adjustments were due to the faster-than-expected August inflation, and a higher “nowcast” print for September.   

Headline inflation unexpectedly rose for the first time in seven months to 5.3% in August from 4.7% in July. Inflation averaged 6.6% in the eight-month period.

Despite the higher forecasts, Mr. Remolona said inflation is still projected to return to the 2-4% target by November in the absence of further supply-side shocks.

“While food and transport prices continue to drive headline inflation, core inflation has moderated further, implying an easing in underlying pressures. In addition, inflation expectations remain anchored to the target range over the policy horizon,” he said. 

Food inflation accelerated to 8.2% in August from 6.3% in July, while transport inflation rose to 0.2% in August from -4.7% in the previous month.

On the other hand, core inflation, which excludes volatile prices of food and fuel, further eased to 6.1% year on year in August.

“The balance of risks to the inflation outlook remains skewed toward the upside. The major upside risks to the inflation outlook are the potential impact of further adjustments in transport fares and electricity rates,” Mr. Remolona said.

Transport groups have filed petitions for a fare increase amid the continued increase in pump prices since mid-July.

Meanwhile, the decision of the US Federal Reserve will have a minimal impact on the Philippines, the BSP chief said.

The US Federal Reserve signaled it would keep rates higher for longer, even as it opted to keep the target Fed fund rate unchanged at 5.25-5.5% at its meeting on Thursday.

“Next year, instead of a total 100-bp (basis point) reduction, it looks like only a 50-bp reduction in the Fed fund target. So that means next year, maybe [there will be] a stronger dollar because it’s a more hawkish stance next year,” Mr. Remolona said.

The local currency closed at PHP 56.855 a dollar on Thursday, depreciating by 4.50 centavos from Wednesday’s PHP 56.81 finish. Year to date, the peso has depreciated by 1.9% or PHP 1.1 from the PHP 55.755 close on Dec. 29, 2022.

Higher for longer
Meanwhile, Mr. Remolona said he does not see any policy easing this year and in the first six months of 2024.

“Rate cuts this year, [and in] 2023, are off the table. But rate hikes are not off the table,” he said. 

“For now, we see a kind of balance between demand and supply. We’re close to the right level for interest rates. Whether there will be a cut next year will depend on bad news when it comes to output,” he added.

Makoto Tsuchiya, assistant economist at Oxford Economics, said the BSP might stay on hold at the remaining meetings this year, before it starts policy easing in the first quarter of 2024.

“Despite the pickup in August inflation, we still expect headline inflation to settle within BSP’s 2-4% target by the end of the year, which should ready the ground for the first cut early next year,” he said. 

Mr. Tsuchiya said that while the peso could further weaken later this year, it would “unlikely to materially affect monetary policy operations.”

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the BSP would continue to balance the growth momentum and inflation.

“The only exception to this scenario would be a rate hike by the Federal Reserve, which could prod the BSP to follow with a rate hike to maintain the modest 75-bps interest rate differential with the Fed,” he said.

Meanwhile, Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said the BSP might cut policy rates by 25 bps in November.

“Admittedly, the risks to this call are skewed to the upside, given the rebuilding of noncore price pressures at the margin. Nevertheless, our forecast is predicated on the likely more urgent need to take pressure off the economy, which we think is in the middle of a shallow technical recession,” he said.

“Pantheon’s base case is that the Fed is done hiking and that inflation in the Philippines should return to the target range in October, opening the door for the start of easing,” he added.

The Philippine economy expanded by 4.3% in the second quarter, the slowest in two years. For the first half, economic growth averaged 5.3%, below the government’s 6-7% target. — Keisha B. Ta-asan, Reporter