MANILA, Philippines — Metropolitan Bank & Trust Co. (Metrobank) expects the Bangko Sentral ng Pilipinas (BSP) to start cutting interest rates in the fourth quarter and maintain a restrictive policy environment for the most part this year amid upside risks to inflation.
In its latest bulletin, Metrobank Research and Market Strategy Department upside risks to inflation remain due to still-elevated food prices and rising geopolitical risks, which could lead to new supply shocks.
“In line with the BSP’s guidance, we forecast domestic headline inflation to peak in July, which in turn would only be observable in early August,” the Ty-led bank said.
“This supports our view that the BSP will start its easing cycle in the fourth quarter, rather than the third quarter, when inflation expectations have settled well within the BSP’s two to four percent range,” Metrobank added.
For a fifth straight meeting in May, the Monetary Board kept its key policy rate steady at 6.5 percent, the highest in 17 years.
From May 2022 to October 2023, the central bank has raised borrowing costs by 450 basis points to tame inflation, stabilize the peso and anchor inflation expectations.
Meanwhile, inflation picked up to 3.8 percent in April from 3.7 percent in March, but still averaged 3.4 percent in the first four months of the year, within the two to four percent target set by the central bank.
“We also continue to see the BSP lagging the US Federal Reserve’s own easing cycle, where we expect the first policy rate cut in the September FOMC meeting, which should then support the peso,” the bank said.
The Philippine peso breached the 58 to $1 level last month and has been hovering near the record low of 59 to $1 amid hawkish remarks from officials of the US central bank. The peso closed at 58.68 to $1 yesterday, down by 17 centavos from its previous finish.
BSP Governor Eli Remolona Jr. earlier said the Monetary Board could cut borrowing costs by 25 to 50 basis points this year, possibly starting as early as August, depending on the inflation and growth data.
He also said there may be room to cut ahead of the US Federal Reserve, which he expects to start its easing cycle in September as well.
Metrobank also sees the peso closing at 56.10 against the dollar by end-2024, supported by a narrower current account deficit.
The current account balance could narrow to $6.1 billion this year compared to the $11.2 billion in 2023 mainly driven by better trade deficit levels and recovering travel exports.
The country’s current account shortfall would also be supported by an expected uptick in business process outsourcing revenues and overseas Filipino workers’ remittances in the fourth quarter.