MANILA, Philippines — The Bangko Sentral ng Pilipinas might start its policy easing in the third quarter, but upside risks due to inflationary pressures and the timing of rate cuts from the US Federal Reserve may warrant a higher for longer stance from the BSP.
Aris Dacanay, economist for ASEAN at HSBC, said headline inflation is expected to breach the government’s two to four percent target band until August because of unfavorable base effects.
However, he said the BSP could start loosening its monetary reins once inflation returns to the target.
“Our base case scenario is for the BSP to cut rates by 25 basis points to 6.25 percent in the third quarter of 2024, and then by 50 basis points to 5.75 percent in the fourth quarter of 2024,” Dacanay said.
The central bank’s Monetary Board opted to maintain policy rates at a near 17-year high for the fourth straight meeting last Monday, keeping the target reverse repurchase rate at 6.50 percent.
The BSP emerged as the most aggressive central bank in the region, hiking interest rates by 450 basis points between May 2022 and October 2023 to tame inflation and stabilize the peso.
According to Dacanay, the risks to the policy rate outlook are on the upside due to inflation and the US Federal Reserve.
“Apart from elevated rice prices, global oil prices have returned to $90 a barrel. This comes at the worst time when unfavorable base effects are at their most potent,” he said.
The continued resilience in the US labor market has also stoked concerns on the timing of the first rate cut from the Fed, which HSBC expects to see in the second quarter this year.
Thus, a delay in the Fed’s easing cycle could also push back the BSP’s first rate cut as this could help mitigate the depreciation pressures for the peso, Dacanay said.
“And with growth in the Philippines very resilient, the BSP, in our view, can afford to delay its first rate cut if it needs to support the peso or to cool inflation further. In other words, the BSP has room to hold its policy rate high for longer,” he added.
Jojo Gonzales, research analyst at Bank of America, said the firm raised its average inflation forecasts to 3.6 percent from 3.3 percent in 2024 and 3.3 percent from 3.1 percent in 2025.
“These estimates imply inflation may average above four percent in the second quarter, which may restrain the BSP from cutting its policy rate in June 2024,” Gonzales said.
“We now think the BSP will cut its policy rate no sooner than August and cut further in October and December, totaling -75 basis points. By comparison, BofA expects the Fed to cut its policy rate by 25 bps in June, September and December,” he said.
Given inflation risks and a possibility that the Fed may keep their own policy rates higher for longer, Oxford Economics economist Makoto Tsuchiya said there is a risk for the BSP to delay rate cuts.
“We think BSP is unlikely to move before the Fed, as a narrower interest rate differential will weigh on the peso. Our US team recently pushed back the timing of the first rate cut by the Fed to June from May, and the risks are tilted towards an even later start of the easing cycle,” he said.
Tsuchiya said if domestic demand remains robust once the first-quarter economic performance is announced on May 9, a week before the BSP meets on May 16, then the BSP will have room to remain patient until the third quarter to start its policy easing.
Meanwhile, ANZ Research said the BSP could slash rates by 50 basis points in the fourth quarter this year, bringing the key rate to six percent by end-2024.