Maybank: Monetary policy tightening in Philippines is over

MANILA, Philippines — The monetary policy tightening in the Philippines that saw interest rates soar by 425 basis points to tame inflation and stabilize the peso is now over, but the Philippines is constrained to decouple from the US Federal Reserve due to weaker external buffers, according to Maybank.

In a report titled “2H 2023: A Post-Pandemic Reality Check,” Maybank said it is not expecting any more rate hikes from any of the ASEAN central banks, including the Bangko Sentral ng Pilipinas (BSP) for the rest of the year.

“Falling inflation has given ASEAN central banks more leeway to pause on their monetary policy tightening or even cut policy rates,” Maybank said.

During a year-long tightening cycle, the BSP raised key policy rates by 425 basis points since it started its interest rate liftoff in May last year to cool inflation and stabilize the peso.

This helped bring down inflation to 5.4 percent in June from a peak of 8.7 percent in January and stabilize the local currency at the 55 to 56 per $1 level.

Maybank expects inflation to ease to 5.5 percent this year and further to three percent next year after accelerating to 5.8 percent in 2022 from 3.9 percent in 2021.

Cooling inflation helped the BSP extend its prudent pause as it kept the benchmark interest rate untouched at 6.25 percent in May and June this year.

Maybank sees the BSP keeping the overnight reverse repurchase rate steady for the rest of the year before lowering it by 200 basis points to 4.25 percent next year.

Maybank said the consumer price index (CPI) in ASEAN has peaked and is falling sharply.

“Inflation has fallen more quickly in ASEAN than the advanced economies, and is within the inflation target of several central banks. Cooling food and energy prices are reflected more discernibly in ASEAN’s headline inflation, due to the heavier CPI basket weights in food and energy compared to advanced countries like US, the United Kingdom, Hong Kong and Korea,” the report said.

In contrast, Maybank said central banks in many advanced economies including the US Fed are struggling to bring down inflation to acceptable levels, and have been forced to continue tightening policy.

Meanwhile, Moody’s Analytics said easing headline and core inflation in the Philippines shows BSP that its past rate hikes are working.

“Price growth in the Philippines is clearly slowing,” the research arm of Moody’s Group said.

Moody’s Analytics said headline inflation may cool further from a 14-year high of 8.7 percent in January.

“We expect inflation to track down but at a slower rate than in the last few months,” it added.

In its Asia’s Fed decoupling scorecard, Nomura has ranked the Philippines at the bottom.

“The Philippines rank at the bottom on the ability to decouple from the US Fed, due to weaker external buffers,” Nomura said in its latest Asia Economic Monthly.

Unlike the past cycles when the BSP moved ahead of the Fed, Nomura pointed out that the Philippine central bank is now constrained due to its wider current account deficit at 4.4 percent of gross domestic product (GDP).

From January 2019 to May 2020, Nomura said the Philippines previously began cutting policy rates two to five months ahead of the US Fed’s first cut to support domestic demand.

“Aggregating these six episodes, we find that the Philippines’ monetary policy was the most decoupled from the Fed with four out of six episodes,” Nomura said.

Nomura said the BSP   is likely to commence its cutting cycle in March next year as newly appointed BSP Governor Eli Remolona has pledged policy continuity and is likely to have a similar stance as former central bank chief Felipe Medalla.

“We think the BSP’s hiking cycle is over and that it is on a prolonged pause,” Nomura said.

Medalla earlier warned it would be dangerous for the BSP to cut rates ahead of the US Fed due to significant foreign exchange implications.

“We expect the current account deficit to remain wide, likely adding to BSP’s caution,” Nomura said.