BSP likely to extend pause until March 2024

The Bangko Sentral ng Pilipinas (BSP) will likely keep its benchmark interest rate steady until the first quarter of 2024, despite easing inflation, Nomura Global Markets said.

Nomura Global Markets Research Chief ASEAN Economist Euben Paracuelles said the BSP’s hiking cycle is over and is now on a “prolonged pause.”

“We continue to forecast an unchanged BSP policy rate at 6.25% until March 2024, which is when we expect its cutting cycle to begin in tandem with our view of the Fed,” he said in an Aug. 4 note.

The Monetary Board in June extended its pause for a second meeting, keeping the key interest rate at a near 16-year high of 6.25%. It has raised borrowing costs by a total of 425 basis points (bps) from May 2022 to March 2023.   

Mr. Paracuelles said the lower-than-expected inflation in July will likely keep the BSP on hold “despite some relatively hawkish rhetoric by officials that the BSP is prepared to resume hiking as needed.”

Headline inflation slowed for a sixth straight month in July to a 16-month low of 4.7% from 5.4% in June. It was the first-time inflation fell below 5% since the 4.9% print in April 2022. From January to July, inflation averaged 6.8%, still higher than the 5.4% forecast by the central bank.

Easing price pressures may prompt the BSP to extend its rate hike pause at its Aug. 17 meeting, First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said.

“With inflationary pressures tapering, the BSP will likely keep policy rates unchanged in its August meeting. The peso has shown sufficient resiliency and does not necessitate an adjustment in policy rates,” FMIC and UA&P said in the latest The Market Call.

However, Mr. Paracuelles said upside risks to food inflation remain due to rising global food prices and the delayed impact of the recent typhoons.

“Further out, El Niño — which the authorities expect to materialize in late 2023 or early 2024 — remains a key risk to watch,” he said.

The El Niño weather event has brought heat waves, dry spells, and heavy rains to countries around the world. It will likely persist until the first quarter next year in the Philippines.

Nomura sees full-year inflation at 5.3%, just a tad below the BSP’s 5.4% forecast and still above the 2-4% target. 

“The trajectory of our forecast nonetheless implies that headline inflation will fall back to within BSP’s target by September, helped by base effects and less sticky core inflation,” Mr. Paracuelles said.

Core inflation, which excludes volatile food and fuel prices, slowed to 6.7% in July from 7.4% in June. For the first seven months of the year, core inflation averaged 7.6%.

Even as it remained above the headline figure, he said core inflation eased more substantially in July as items such as restaurants and accommodation services have become less “sticky.”

“We think a resumption of BSP’s hiking cycle will be inhibited by the continued decline in inflation, which we expect to continue in the coming months, barring new supply-side shocks,” Mr. Paracuelles said.

As inflation is on track to return to its target range by the fourth quarter, FMIC and UA&P said this will help “contribute to stronger consumer spending.”

Earlier, BSP Governor Eli M. Remolona said the central bank remains ready to resume tightening to prevent broadening of price pressures if large supply shocks occur.

“This rhetoric also suggests the BSP is not in a rush to start cutting either, partly because we believe the newly appointed governor, Mr. Remolona, who has pledged policy continuity, likely shares the same view as his predecessor that it will be ‘dangerous’ to cut ahead of the Fed,” Mr. Paracuelles said.

“At the same time, the bar for the BSP to start its cutting cycle in the near term remains high, in our view, and will be carefully assessed by the BSP with due consideration of the Fed outlook to avoid adding to FX (foreign exchange) pressures and the risk of capital outflows,” he added.

Former BSP Governor Felipe M. Medalla earlier said before his term ended that it will be dangerous to start cutting rates before the US Federal Reserve due to markets’ preference for a wide interest rate differential between the Philippine and the US central banks. — Keisha B. Ta-asan and Luisa Maria Jacinta C. Jocson