BSP unlikely to cut rates this year

The Bangko Sentral ng Pilipinas (BSP) may keep its key benchmark rate at 6.25% for the rest of the year, before it starts policy easing by early 2024.

Finance Secretary and Monetary Board member Benjamin E. Diokno said the BSP will likely maintain a long pause.

“I think we will continue to maintain, maybe a long pause. I don’t see any cut until we really have strong evidence of a decline (in inflation),” Mr. Diokno said in a press chat on Friday.

Last week, the Monetary Board extended its policy hold for a second straight meeting, keeping the key policy rate at 6.25%.

According to Mr. Diokno, inflation will likely decelerate to within the 2-4% target range by September or the fourth quarter this year.

Headline inflation eased to 6.1% in May from 6.6% in April. The BSP last week trimmed its average inflation forecast for 2023 to 5.4% from the 5.5% it gave in May. The new projection is lower than the 5.8% average in 2022, but still above the 2-4% target.

“Our expectation is that inflation may hit below 2% by the first quarter next year because of base effects. That will be the time for considering the cuts because globally, inflation remains persistent. We’re just trying to be more conservative,” Mr. Diokno said. 

The BSP projects inflation to further slow to 2.9% in 2024, before accelerating again to 3.2% in 2025.

Mr. Diokno is not concerned with the policy moves of the US Federal Reserve, saying he is more focused on the domestic economy.

The Federal Open Market Committee (FOMC) raised its key interest rates by 500 basis points (bps) since March 2022, bringing the Fed funds rate to 5-5.25%. The Fed paused its tightening at its June 14 meeting but signaled it may hike rates amid sticky inflation and strong US economic activity.

“Right now, the interest rate differential is 1.25. If they hike by 25 bps, we’re still OK. We have a lot of dollar buffers… plus we have a steady source of income from business process outsourcing (firms), overseas remittances and foreign direct investments,” Mr. Diokno said in mixed English and Filipino.   

Gross international reserves (GIR) slid by 0.5% to USD 101.3 billion as of end-May from USD 101.8 billion as of end-April. Year on year, the GIR declined by 2.3% from USD 103.65 billion.

Security Bank Corp. Chief Economist Robert Dan J. Roces said the BSP may respond to the Fed if it hikes by 25 bps at its July 25-26 meeting, which would bring the policy rate to 6.5%.

“We expect the BSP to match the size by August if only to keep the 1% Fed-BSP policy differential intact and prevent a repeat of last year’s peso depreciation event. The (foreign exchange rate) remains confined in a volatile range thus keeping to the differential will be crucial,” he said.

The peso depreciated to its record low of PHP 59 against the dollar in October last year. The local currency has since rebounded, closing at PHP 55.77 versus the greenback on Friday.

For HSBC (Hongkong and Shanghai Banking Corp.) economist for ASEAN (Association of Southeast Asian Nations) Aris Dacanay, the BSP will keep interest rates steady until the third quarter of 2024.

“In the near term, we expect the BSP to stand pat even if the Fed raises its policy rate by 25 bps (to 5.25-5.5%) in July — thus narrowing the yield differential between the BSP and the Fed rates to 75-100 bps,” Mr. Dacanay said. 

He said the dollar is not as strong as last year, and that the BSP was able to raise its dollar buffers since the fourth quarter of 2022.

“Nonetheless, big risks to the policy rate outlook would emerge if the Fed hikes more than expected and the yield differential narrows even further,” Mr. Dacanay added.   

Makoto Tsuchiya, assistant economist from Oxford Economics Japan, said the Fed may pause for the rest of the year before cutting rates in the first quarter of 2024.

“Improving current account balance given lower import demand also provides some support for the peso. This will allow the BSP to pivot early next year by shifting its focus to growth,” Mr. Tsuchiya said.

Earlier this month, the Philippine central bank lowered its forecasts for the country’s current account deficit for this year amid weaker global growth prospects.

The current account balance is now projected to reach a USD 15.1-billion deficit equivalent to -3.4% of gross domestic product (GDP), narrower than the USD 17.1 billion (-4% of GDP) forecast previously.

Based on BSP data, the current account deficit stood at USD 17.8 billion in 2022, higher than the USD 5.9-billion shortfall seen in 2021, amid a wider trade in goods deficit.

Nalin Chutchotitham, Citigroup, Inc. economist for the Philippines, said there will be no changes in the BSP’s policy rates this year up to early 2024.

“The BSP maintains a cautious tone about remaining upside risks to inflation stemming from increase of transport fares, minimum wages, and effects of El Niño in the months ahead, but also highlighted stable inflation expectations and easing of supply-side inflationary pressures,” she said.

Ms. Chutchotitham added that the BSP is unlikely to deliver more rate hikes this year as economic growth started to slow.

The economy grew by 6.4% in the first quarter, slower than the 8% expansion in the first quarter of 2022, but is still within the government’s 6-7% target for the year. — Keisha B. Ta-asan, Reporter with inputs from Luisa Maria Jacinta C. Jocson