BSP likely to be patient in keeping policy rates steady — GlobalSource

The Bangko Sentral ng Pilipinas (BSP) will likely maintain policy rates in the meantime, GlobalSource Partners said, adding that any off-cycle cuts could impact inflation expectations.

“It is our expectation that the BSP will be patient in keeping its policy rate steady. After all, for the BSP, it is not simply about increasing or decreasing interest rates,” GlobalSource country analysts Diwa C. Guinigundo and Wilhelmina C. Mañalac said in a report.

“Keeping the rate steady seems to be gaining more ground given the ‘evolving inflation conditions,’” it added.

The Monetary Board is scheduled to hold a policy meeting today (Aug. 15).

BSP Governor Eli M. Remolona, Jr. on Tuesday said there is “more room to stay tight” amid the faster-than-expected gross domestic product (GDP) growth in the second quarter.

Second-quarter GDP grew by 6.3%, its fastest growth in five quarters or since 6.4% in the first quarter of 2023.

GlobalSource noted that these latest comments from Mr. Remolona are a departure from the BSP’s earlier signals of cutting rates, possibly by 25 basis points, as early as this month.

“In previous weeks, the BSP, the country’s monetary authority, was viewed as being confident in cutting policy rates even ahead of the US Fed. Given the latest inflation information, however, there has been some retreat in the messaging this week,” it added.

Headline inflation accelerated to 4.4% in July, the fastest in nine months. It also ended seven straight months of inflation settling within the central bank’s 2-4% target.

GlobalSource also noted that the Monetary Board’s decision to keep rates unchanged at their June meeting was a “right decision.”

“If the BSP had eased monetary policy two months ago, its decision would have been awkward in the face of the 4.4% July inflation,” it said.

“While this may be a blip that may not result in a long-term trend, this single point might be enough to affect inflation expectations, disrupt capital inflows and drive the weakness of the peso, all of which are undesirable for controlling inflation,” it said.

The central bank earlier said the spike in July inflation is temporary, and that inflation should return to target beginning August.

“The BSP’s conservative stance has appropriately taken into account the likelihood of out-of-target June and July inflation rates, which could eventually dislodge short-term inflation expectations — the delay in the reduction of tariff rates on imported rice and the effects of supply constraints, particularly food are too unpredictable,” GlobalSource said.

‘NOT GOOD FOR OPTICS’

Meanwhile, GlobalSource in its report advised the central bank against any off-cycle moves.

“However, this would not be good for optics because it would show that the patience of the BSP was too prolonged and well behind the curve. Nor is it good for keeping inflation expectations anchored,” it said.

Mr. Remolona had earlier said that the central bank is “always open” to any off-cycle moves.

GlobalSource said that a change in monetary policy is “not crucial at this point” due to robust growth and improved labor conditions, among other positive macroeconomic indicators.

“More important, the favorable impact of the reduced rice tariff on prices has still to be reflected in subsequent inflation numbers,” it added.

Rice prices are expected to go down with the entry of imports at lower tariffs. Last June, President Ferdinand R. Marcos, Jr. signed an executive order slashing tariffs on rice imports to 15% from 35% previously until 2028.

“Moving forward, BSP should be mindful of the remaining upside risks to inflation coming from higher food prices, transport charges, higher power rates, and global fuel prices.”

GlobalSource also noted that monetary policy should be about “ensuring that inflation is at an appropriate level that both business and households, and even governments, can ignore because price stability has produced the right costs for goods, services, and money for them.”

It said that monetary policy does not concern itself with reducing lending costs to allow the government to secure cheap borrowing.

“Appropriate monetary policy is not about enabling consumers to borrow from lending institutions to spend on travel and other personal effects, even if that is within their discretion,” it added.

PESO IMPACT

Meanwhile, Finance Secretary Ralph G. Recto, who is also a Monetary Board member, said that the peso’s recent rebound will be a factor in the BSP’s potential easing cycle.

“It’s a positive factor. That’s a factor for easing,” he told reporters on the sidelines of a Senate hearing on Wednesday.

The local unit closed at PHP 56.955 per dollar on Wednesday, strengthening by half a centavo from its PHP 56.96 finish on Tuesday.

This was the peso’s strongest finish in almost four months or since its PHP 56.808-per-dollar close on April 15.

On the other hand, the strong growth and employment figures support the case for keeping rates steady, Mr. Recto said.

“Based on the data, we will make a decision (on Thursday). We will be voting on that… but safe to say, as I mentioned, I do not think that there will be an increase in rates within the year. If at all, it should go down,” he added. — Luisa Maria Jacinta C. Jocson