BSP to keep policy rates steady in June

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) will likely keep borrowing costs restrictive at its meeting this month despite inflation staying within the two to four percent target in May as risks continue to persist.

While headline inflation has gradually picked up to 3.9 percent in May since February, Bank of the Philippine Islands lead economist Jun Neri said the month-on-month figures have surprised on the downside for the past three months.

However, the upward momentum in inflation may continue to persist in the next two months, bringing the headline print to above four percent in June and July, amid unfavorable base effects, weaker peso against the dollar as well as lingering food supply issues.

“The BSP will likely keep its monetary policy restrictive in the first half of the year as inflation risks are seen to persist in the near term. Rate cuts may only be considered once inflation stabilizes within the BSP’s target range in the third or fourth quarter,” Neri said.

But the timing and size of future rate cuts would also depend on the future policy decisions of the US Federal Reserve.

“If local inflation conditions are right, the BSP will likely respond immediately with rate cuts once the Fed begins its easing cycle,” he said.

Citi economist for the Philippines Nalin Chutchotitham said risks such as planned adjustments to excise taxes on water rates, alcohol and tobacco as well as larger-than-expected minimum wage hikes could prompt the BSP to keep rates at the June 27 meeting.

“We maintain our call for 25-basis-point rate cuts in August, October and December 2024, followed by 25-basis-point rate cuts in February, May and August 2025,” she said.

“Our forecasts are based on the assumption that the BSP would adjust policy stance to ensure that it is not too tight to support economic momentum,” she said.

However, there is still a possibility of a delay in interest rate cuts, Chutchotitham said, given that the economy remains robust and if there is high volatility in the foreign exchange market.

“We think that in the event of high foreign exchange volatility, the BSP might also opt for delayed rate cuts to support the peso, especially if the Fed begins cutting later than July,” she said.

If the BSP reduces its policy rate ahead of the US Fed, Neri said a narrowed interest rate differential might lead to currency depreciation, which could outweigh the slowdown in food prices.

The Philippine economy has also been resilient as loan growth accelerated for the seventh straight month to 9.6 percent in April from 9.4 percent in March.

“We now expect a rate cut of around 50 basis points this year, assuming the FOMC eases sometime in the second semester,” Neri said.

The peso may also appreciate against the dollar in the second half of 2024, depending on what the US Fed will do.