MANILA, Philippines — The Philippines has the least monetary policy freedom in Southeast Asia, forcing the Bangko Sentral ng Pilipinas (BSP) to slash interest rates only when the US Federal Reserve starts doing so.
In a report, HSBC Global Research said the Philippines has the least room to go against the move of the Fed among economies in the ASEAN region.
This means the BSP is unlikely to slash the key policy rate, which is currently at 6.25 percent, ahead of the Fed, even as inflation is on a downward trend and even as the rest of the region starts cutting rates.
“The Philippines does not have the same monetary policy freedom. Domestic conditions there need time to cool and stabilize,” HSBC said.
“The Fed’s gravitational pull is stronger, perhaps even the strongest, in relation to the Philippines. We only expect the Philippines to cut policy rates after the Fed cuts its own,” it said.
As such, the HSBC unit expects the BSP to only cut rates by 25 basis points by the third quarter of 2024 and deliver another quarter of a percentage cut by the succeeding quarter.
The Fed, on the other hand, is projected to start easing only by the second quarter of next year.
HSBC emphasized that decoupling from the Fed too early can lead to significant capital outflows and sudden drops in currencies as investors hunt for higher yields.
Such a consideration is core to monetary policymaking, and perhaps second only to inflation and growth.
HSBC also warned that the Philippines remaining in a twin deficit would make it harder for the country to decouple from the Fed.
A twin or double deficit happens when a country has both a current account deficit and budget deficit, which means that imports are higher than exports and that the government is spending more money than the revenues it is generating.
“Not only is the Philippines a consumption-driven economy, but the government is embarking upon a much needed and ambitious agenda of spending more than five percent of its economy on public infrastructure and will, thus, demand a lot of materials from abroad, such as steel and technology,” HSBC said.
Further, the banking giant warned that inflation could start picking up yet again next year, which means that the current slowdown will likely be temporary.
HSBC said inflation may rise once again by the second semester of 2024 as temporary tariff cuts on rice, coal, corn and pork will expire, which could reintroduce another inflationary wave to the country.
“We estimate the maximum impact of these tariff adjustments to inflation to be as much as 1.4 percentage points,” HSBC said.
“We expect headline inflation to be tangent to the BSP’s upper-bound target range of four percent in the second half – a level that will likely complicate the BSP’s timing of the rate cuts,” it said.
Meanwhile, as the fastest-growing economy in ASEAN at the moment, HSBC noted that such a position would give the BSP room to keep the monetary reins tight and steady.
Rate cuts usually enter the discussion when growth rates dip below their potential.
Nonetheless, HSBC expects growth to moderate next year as households begin to build back their savings.
The current savings rate remains far below pre-COVID levels.
“This partly explains why domestic demand in the Philippines has so far remained robust. Thus, to incentivize saving in the Philippines, the BSP will likely keep monetary policy tight for quite some time,” HSBC said.