BSP extends policy rate hike pause

THE BANGKO SENTRAL ng Pilipinas (BSP) kept benchmark interest rates unchanged for a second straight meeting on Thursday, and signaled policy easing is unlikely in the near term. 

At its fourth policy meeting for the year, the Monetary Board maintained its overnight reverse repurchase rate at 6.25%, as expected by 15 economists in 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 deems it appropriate to maintain current monetary policy settings to allow the BSP to further assess how inflation and domestic demand have responded to tighter monetary conditions,” BSP Governor Felipe M. Medalla said in a press briefing.

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

Asked if the BSP would cut rates this year, Mr. Medalla said he would like to wait to verify forecasts that inflation would continue easing.

“I would like to see two months of below 4% inflation before considering cutting,” he said.

The BSP also trimmed its average inflation forecast for 2023 to 5.4% from the 5.5% it gave in May. This is still above the 2-4% target range. 

“The main reasons for the adjustments are the lower-than-expected inflation outturn in May and the, although this is still preliminary, we are looking at a lower month-ahead forecast for June,” BSP Deputy Governor Francisco G. Dakila, Jr. said in the same briefing.

Headline inflation slowed to 6.1% in May from 6.6% in April. April marked the 14^th straight month that inflation breached the central bank’s 2-4% target range.

For the first five months, inflation averaged 7.5%, still well above the BSP’s revised 5.4% forecast for the year.

But the BSP chief assured the worst supply shocks have already passed, and that inflation will be below 4% by October or November this year. He also added that core inflation, which excludes volatile prices of food and fuel, will follow suit.

Core inflation slowed to 7.7% last month from 7.9% in April. It averaged 7.8% in the five-month period.

However, Mr. Medalla flagged lingering upside risks to the inflation outlook, citing the “potential impact of additional transport fare increases and minimum wage adjustments, persistent supply constraints of key food items, El Niño weather conditions, and possible knock-on effects of higher toll rates on agricultural prices.”

“Going forward, the BSP remains prepared to resume monetary tightening as necessary, in line with its data-dependent approach to ensuring price and financial stability,” he added.

INFLATION OUTLOOK

For 2024, the BSP increased its average inflation projection to 2.9% from 2.8% previously.

“The main driver would be a continued opening up of the economy and the impact of a more hawkish Fed,” Mr. Dakila said, adding that economic activity would be stronger next year.

According to Mr. Medalla, the main source of inflation for next year would be supply-driven. “Our own numbers show that the growth of supply is just behind the growth of demand. This inflation is a supply-driven inflation,” he said.

Mr. Medalla noted there is a possibility that gross domestic product  growth will be slower next year, as “recent demand indicators suggest a likely moderation in economic activity over the policy horizon, reflecting the impact of the BSP’s cumulative policy rate adjustments as well as weak global growth prospects.”

Meanwhile, the central bank gave a 3.2% inflation forecast for 2025.

“The forecast is really model-driven. The factors that we considered include the outlook for oil, the futures prices for non-oil products, and the outlook for global economic growth,” Mr. Dakila said.    

Mr. Medalla said the Philippine central bank is more focused on its domestic inflation outlook rather than the policy moves of the US Federal Reserve.

If the US Federal Reserve hiked policy rates by 50 bps suddenly, he said it would be “hard to not respond.”

Mr. Medalla, who is completing the unexpired term of his predecessor Benjamin E. Diokno, is set to step down on July 3 unless he is reappointed by President Ferdinand R. Marcos, Jr. to a fresh term.

“(The President’s) choice for governor will likely inform our outlook for BSP’s policy stance, but should Mr. Medalla be reappointed, we expect BSP to be on hold for at least two more policy meetings before possibly cutting rates once inflation settles back within target,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in a note.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said he expects the BSP to pause until inflation falls within the 2-4% target.

“Our own 5.4% full-year average forecast implies that the headline rate should return to this range in September, at the earliest, and fall further still, dropping below the 3% midpoint before the end of the year,” he said. 

Capital Economics Senior Asia Economist Gareth Leather said Mr. Medalla gave no clear guidance over its next move, but the BSP may start to cut rates early next year.

“The main reason we think the central bank will start cutting rates soon is that inflation is now firmly on its way down,” Mr. Leather said. 

Another factor that should be considered is the slowing economic growth this year, he said.

“We think the country faces a difficult few quarters ahead as weak global demand and tight monetary policy weigh on prospects,” he added.

The Monetary Board’s next policy meeting is scheduled for Aug. 17. – Keisha B. Ta-asan, Reporter