BSP likely to keep rates unchanged

The Bangko Sentral ng Pilipinas (BSP) is expected to keep benchmark interest rates steady for a second straight meeting on Thursday after inflation eased further last month and the US Federal Reserve likewise paused its tightening cycle last week.

Fifteen economists in a BusinessWorld poll held last week all expect the Monetary Board to maintain the overnight repurchase rate at a near 16-year high of 6.25% during its June 22 meeting.

If realized, this would be the second straight meeting the BSP will leave interest rates untouched. The central bank had raised borrowing costs by 425 basis points (bps) from May 2022 to March 2023 to help bring elevated inflation down.

“The decline in the latest headline and core inflation readings in May will give the BSP confidence to hold its policy rate steady at the June meeting,” Moody’s Analytics economist Sarah Tan said in an e-mail.

“Notably, headline inflation is firmly trekking down with each step covering quite a distance. Adding to the good news, core inflation clocked its first back-to-back decline since February 2022. This reflects that underlying inflation expectations are starting to cool albeit in small step,” Ms. Tan said.

Philippine headline inflation slowed to 6.1% in May from 6.6% in April, preliminary data from the Philippine Statistics Authority (PSA) showed. Still, this 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 5.5% forecast for the year.

Meanwhile, core inflation, which excludes volatile food and fuel prices, slowed to 7.7% last month from 7.9% in April. It averaged 7.8% in the five-month period.

“We believe the BSP will maintain the key policy rate at 6.25% at the next meeting given declining inflation and stabilizing interest rate differential with the US, which removes depreciation pressures on the currency,” Makoto Tsuchiya, assistant economist at Oxford Economics, said in an e-mail.

The US Federal Reserve decided to keep its target interest rate steady at 5-5.25% during its June 13-14 meeting, the first pause after it hiked borrowing costs by 500 bps since March last year.

HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris Dacanay said maintaining policy rates should give the Philippine central bank time to assess the effects of its policy tightening on economic growth.

“So far, the economy is showing mixed signals. On one hand, investment may already be moderating; import demand for capital has slowed while outstanding loans for economic activities have eased year on year,” Mr. Dacanay said in a note.

“On the other hand, import demand for consumption goods and outstanding loans for consumption have been resilient,” he said.

The Philippine economy grew by 6.4% in the first quarter, the slowest in two years.

Mr. Dacanay also noted that the banking sector remains healthy despite rising nonperforming loans (NPL) since the start of the year.

Soured loans of Philippine banks rose by 3.05% to PHP 427.265 billion in April from a month prior, bringing their NPL ratio to 3.41% – — the highest in seven months.

FED MOVE AWAITED

Looking ahead, headline inflation is expected to return within the BSP’s 2-4% target before the year ends amid favorable base effects, which could give the Monetary Board room to consider a cut, analysts said, but possible increases by the Fed could delay the timing of policy easing.

“I expect the BSP to start making a case by the late third quarter or early fourth quarter for a rate cut (25 bps per meeting) and likely see a cut by the November and December meetings. If what I expect comes true, the year-end key rate should be at 5.75% at least,” said Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp.

However, the Fed could hike rates again in the second half of the year, which could be mirrored by the BSP to keep the rate differential healthy, Alvin Joseph A. Arogo, economist from the Philippine National Bank, said.

“We keep our baseline view that the (key) rate will stay at 6.25% throughout the remainder of 2023. However, there is now a higher risk that the BSP may raise rates to respond to what the Fed might do in the second half of this year,” Mr. Arogo said.

“This is because the revised Fed ‘dot plot’ opened the door for a 50-bp hike in the next six months,” he added.

Last week, the Federal Open Market Committee signaled that they could hike rates by 25 bps twice within the year amid sticky inflation and a robust US economy.

“The Fed’s latest guidance of possibly two more 25-bp hikes could force an additional 25-bp increase from the BSP to prevent capital flight and excessive peso depreciation. We do not think the BSP would take any chances of a repeat of last year’s record-low peso depreciation and add to the upside risks to the inflation outlook,” China Banking Corp. Chief Economist Domini S. Velasquez said.

“But we think the BSP will be in ‘wait-and-see mode’ for the Fed’s next move in July and how financial markets will react to a narrowing interest rate differential. With both the Fed and the BSP possibly extending their hiking cycles, previously anticipated BSP rate cuts this year would likely be pushed to 2024,” she added.

In October last year, the peso reached a record low of PHP 59 against the dollar as the greenback surged amid hawkish signals from the Fed.

Ms. Velasquez added that instead of a rate cut, the BSP may choose to cut banks’ reserve requirement ratio (RRR) again to support economic growth.

The Monetary Board cut the reserve ratio for big banks and nonbank financial institutions with quasi-banking functions by 250 bps to 9.5% effective June 30.

The RRR for digital banks was also cut by 200 bps to 6%, and by 100 bps to 2% for thrift banks. The reserve ratio for rural and cooperative banks was likewise lowered by 100 bps to 1%.

The cuts will coincide with the expiration of a pandemic relief measure that counts loans to micro, small, and medium enterprises as alternative compliance with reserve requirements.

Moody’s Analytics’ Ms. Tan likewise said a rate cut is not possible this year due to elevated core inflation.

“Further, the BSP remains cautious of headwinds from the slowing global environment and the potential impact of El Niño on food prices… A cut in policy rate this year may not be necessary and could risk weakening the peso against the greenback,” she said.

She added that Moody’s Analytics expects policy easing in the first half of 2024. – Keisha B. Ta-asan, Reporter