BSP to keep policy stance sufficiently tight

Despite inflation downtrend

MANILA, Philippines — Despite the slowdown in the rise in consumer prices in the past four months, monetary authorities deem it necessary to keep monetary policy settings sufficiently tight until there is sustained decline in inflation.

Inflation eased further to 2.8 percent in January, the lowest in more than three years or since the 2.3 percent recorded in October 2020, from 3.9 percent in December, according to the Philippine Statistics Authority.

This is also the second straight month that headline inflation stayed within the two to four percent target of the Bangko Sentral ng Pilipinas (BSP) after breaching the range for 20 straight months or since averaging 4.9 percent in April 2022.

Last month’s inflation outturn was the lower-end of the BSP’s forecast range of 2.8 to 3.6 percent.

“This inflation outturn is consistent with the BSP expectations that inflation will likely moderate in the first quarter of 2024 due largely to negative base effects and some easing of supply constraints affecting key commodities,” the central bank said.

However, the BSP said inflation could temporarily accelerate above the target range from the second quarter of the year due to the impacts of El Niño weather conditions and positive base effects.

“The balance of risks to the inflation outlook still leans significantly toward the upside,” it said.

According to the BSP, key upside risks are associated with potential pressures emanating from higher transport charges, increased electricity rates, higher oil prices and higher food prices due to strong El Niño conditions.

Meanwhile, it pointed out that the impact of a relatively weak global recovery and the government measures to mitigate the effects of El Niño could ease some price pressures.

“Looking ahead, the Monetary Board deems it necessary to keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes evident,” the BSP said.

Monetary authorities are expected to consider the latest inflation and gross domestic product (GDP) outturns during the first rate-setting meeting of the Monetary Board on Feb. 15.

BSP Governor Eli Remolona Jr. earlier discounted the possibility of a rate cut within the first half of the years, saying such move is “too soon.”

He also did not discount the possibility of another rate hike as the economy is able to absorb the continued tightening cycle via aggressive rate hikes.

The BSP has emerged as the most aggressive central bank in the region after hiking key policy rates by 450 basis points since May 2022 to fight inflation and stabilize the peso.

Despite the slide in headline inflation, ING senior economist Nicholas Mapa said the BSP is expected to retain its hawkish tone as it promised to keep the policy stance “sufficiently tight” for the time being.

Mapa said the BSP governor already indicated that he was expecting inflation to slide in the first quarter before accelerating sharply in the second quarter, justifying his outlook for rates to stay higher for longer.

However, he added that Remolona was recently quoted as saying that a rate cut in the second half was possible, but that he would need to see inflation settle well within the target range for an extended period.

“If we continue to see inflation moderate well into the second half, we do expect the BSP to begin to change their tune to signal a pivot, possibly by June,” Mapa said.

Just like the US Federal Reserve, HSBC economist for ASEAN Aris Dacanay said the BSP is expected to keep its policy rates steady on Feb. 15, while maintaining a hawkish stance as upside risks to inflation linger.

“We expect the BSP to maintain its monetary stance next week at 6.50 percent. With growth pleasantly surprising to the upside in the fourth quarter of 2023, the BSP has the convenience of time to wait for inflation to really settle within its target band before beginning its easing cycle,” Dacanay said.

He said the BSP is not expected to cut ahead of the Fed.

“Maintaining its current rate differential with the Fed will help mitigate any volatility in the dollar-peso and prevent foreign exchange changes in re-stoking inflation,” Dacanay said.