BSP seen to keep rates unchanged

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is likely to leave rates unchanged anew this week as it remains on a hawkish stance despite easing inflation.

China Bank chief economist Domini Velasquez said the central bank’s Monetary Board is likely to keep its benchmark policy rate at 6.50 percent as inflation remained contained, easing to 2.8 percent in January, the lowest in more than three years, from 3.9 percent in December.

“We think that there is still a chance for inflation to overshoot the four percent target with looming risks on the horizon. Hence, BSP will likely continue to maintain its hawkish stance despite within-target inflation in the last two months,” Velasquez said.

The bank economist sees inflation easing to 3.8 percent this year and 3.3 percent next year after quickening further and overshooting the BSP’s two to four percent target range at six percent in 2023.

Inflation eased for the fourth straight month to 2.8 percent in January from a 14-year high of 8.7 percent in January 2023.

Velasquez said the US Federal Reserve left its policy rate unchanged last week and is currently expected to do the same thing in its March meeting.

“We think the BSP will not cut rates ahead of the Fed,” she added.

Aris Dacanay, economist for ASEAN at HSBC, also said it is unlikely for the Monetary Board to cut ahead of the Fed as the country’s current deficit remains wide, the savings rate still needs time to recover, and the real policy rate differential between the two central banks remains narrow.

“Thus, cutting ahead of the Fed may result in a volatile peso, which in turn could lead to forex-induced inflation,” Dacanay said.

Despite headline inflation easing faster than expected, the HSBC economist sees the consumer price index (CPI) accelerating and eventually touching the upper end of the two to four percent target in the coming months.

As inflation risks remain tilted to the upside, Dacanay said the central bank would likely maintain its current monetary stance on Thursday, its first rate setting meeting for the year.

“Fortunately, the BSP has the luxury of time. There is minimal risk looming that would pressure the BSP to cut policy rates very soon,” he added.

For his part, Security Bank chief economist Robert Dan Roces said the BSP is expected to shift gears and gradually ease monetary policy stance once the Fed does so as well.

“The local policy rate is projected to decrease to 5.50 percent by the end of 2024, in cautious increments of 25 basis points to total 100 bps - likely matching a similar-sized move by the Fed - and to provide support to economic activity through lower borrowing costs,” Roces said.

The BSP has kept interest rates on hold after a 25-bp off-cycle hike in October 2023.

As the month-on-month price increases exceeded seasonal expectations and suggests potential long-term inflation exceeding the target range, Roces said this could prompt the central bank to hold off on rate cuts for most of the first half despite seemingly positive headline and core inflation numbers.

“Despite Philippine inflation dipping below target and core inflation reaching its desired level, a rate cut by the central bank in February is unlikely,” he added.

Jun Neri, lead economist at Bank of the Philippine Islands, said the BSP may keep its rates steady in the first half of the year, taking into account a possible inflation rebound in the second quarter.

“The BSP has enough reason to keep rates steady for now, which might be prudent considering the possibility of inflation exceeding the target in the second quarter,” Neri said.

According to Neri, rate cuts are possible in the second half of the year once inflation is firmly within the target of the BSP.

The BPI economist sees the central bank slashing interest rates by 75 basis points to 5.75 percent this year should inflation stabilize within the target range in the second half of the year.

He also noted that the gross domestic product (GDP) growth of 5.6 percent in the fourth quarter of 2023 showed the economy remains resilient despite the aggressive rate hikes from the BSP.