High interest rates seen persisting in 2024

MANILA, Philippines — Economists expect interest rates to stay elevated in the Philippines as the Bangko Sentral ng Pilipinas (BSP) is likely to start cutting key policy rates only by the second half of next year.

Aris Dacanay, economist for ASEAN at HSBC, said the BSP Monetary Board is likely to pivot to an easing cycle only in the second half of next year, with the central bank cutting interest rates starting in the third quarter.

“With inflation likely breaching the BSP’s two to four percent target band again in 2Q 2024, we maintain our view that the BSP will only begin its easing cycle in 3Q 2024,” Dacanay said.

Unlike the US Federal Reserve that decided to keep its policy rate at 5.25 to 5.50 percent and pivoting towards the possibility of rate cuts next year, he explained that the BSP maintained a hawkish tone when it decided to leave interest rates untouched last Dec. 14 as inflation risks still tilted to the upside.

The economist said the consumer price index (CPI) in the Philippines is expected to surge anew and breach the central bank target range in the second quarter of next year.

“And with the expectation that headline CPI will reignite sometime in the second quarter, the BSP will still likely begin its easing cycle in 3Q 2024 (our baseline view), even if the Fed begins cutting rates in the quarter before,” Dacanay said.

In order to tame inflation and stabilize the peso, the BSP has raised interest rates by 450 basis points since May last year, making it the most aggressive central bank in the region.

This brought the benchmark interest rate to a 16-year high of 6.50 percent, the highest since the 7.50 percent recorded in May 2007, from an all-time low of two percent during the height of the COVID-19 pandemic.

“We expect the BSP to start with a modest 25bp cut and then follow the Fed’s pace, cutting by 25bp in each quarter until the BSP rate normalizes to 5.00% by 2025,” Dacanay said.

ING Bank senior economist Nicholas Mapa said the Philippine central bank is likely to extend its hawkish pause until inflation is well-within target and until inflation expectations are anchored.

“We expect the BSP to be on hold well into 2024, with potential rate cuts only likely to be considered toward the end of next year,” Mapa said.

The BSP Monetary Board decided to keep interest rates steady last Nov. 16 and Dec 14 after a 25-basis point off-cycle hike last Oct. 26.

Mapa explained the BSP justified their off-cycle rate hike by indicating that consumer expectations for inflation were elevated.

No less than BSP Governor Eli Remolona Jr. has said it is still premature to talk about rate cuts amid the easing inflation.

Inflation averaged 6.2 percent between January and November this year, still way above the central bank’s two to four percent target range. The headline inflation eased to a 20-month low of 4.1 percent in November from 4.9 percent in October.

“I think that the data is not so convincing yet as to when it’s a good time to start easing. For now,  we’re hawkish for the time being,” Remolona said in an interview with CNBC Asia last Friday.

Last Thursday, the central bank lowered its risk-adjusted full-year inflation forecasts to six percent from 6.1 percent for 2023 and to 4.2 percent from 4.4 percent for 2024, previously. It retained its risk-adjusted inflation forecast for 2025 at 3.4 percent.

The BSP chief pointed out that the decline in inflation is not a trend due to the upside risks.