BSP seen cutting interest rates in October

MANILA, Philippines — Despite the lower inflation outturn in June, Metropolitan Bank & Trust Co. (Metrobank) expects the Bangko Sentral ng Pilipinas (BSP) to start its gradual easing cycle in October to prevent any depreciation pressure on the peso.

In a report, Metrobank’s Research and Market Strategy Department said the lower-than-expected June inflation supports the Bangko Sentral ng Pilipinas (BSP)’s shift to a more dovish tone, increasing the chance of a rate cut on Aug. 15.

“But despite the lower inflation path, we continue to believe the BSP will hold off on cutting policy rates until its Oct. 17 meeting with a 25-basis-point cut, followed by another 25-basis-point cut on Dec. 19, to support the peso,” it said.

If realized, this would bring the BSP’s benchmark interest rate down to six percent from the current 6.5 percent level. The Monetary Board has kept borrowing costs unchanged since it last hiked rates in October 2023.

However, Metrobank said the BSP may cut interest rates at its next policy review on Aug. 15 if inflation would continue to be lower in July coupled with clearer dovish signals from the US Federal Reserve on its own easing cycle.

Data from the Philippine Statistics Authority (PSA) showed inflation eased to a four-month low of 3.7 percent in June from 3.9 percent in May, snapping four straight months of increases.

In the first half of the year, average inflation stood at 3.5 percent, still above the BSP’s risk-adjusted forecast of 3.1 percent for the whole year.

According to Metrobank, June inflation was well-below its 4.1 percent forecast for the month while the year-to-June average is still within the bank’s forecast range of 3.3 to 3.6 percent for this year and the BSP’s two to four percent target.

“Prices of housing, water, electricity, gas, and other fuels were the primary drivers of the lower-than-expected inflation print, particularly the decrease in electricity rates, which decelerated by 13.6 percent,” it said.

It also noted that rice prices, which accounts for about 8.9 percent of the country’s consumer price index (CPI) basket, slowed to 22.5 percent in June from 23 percent a month ago.

Still, rice inflation remained the main contributor to inflation with a share of two percentage points out of the 3.7 percent headline print.

“Rice prices are expected to remain elevated until July due to low base effects. However, on a month-on-month basis, we expect rice prices to continue slowing, driven by a sustained decline in global rice prices,” Metrobank said.

The lower rice tariffs may also drag headline inflation down in the coming months. If realized, monthly headline inflation will likely peak in July before it goes downwards thereafter.

“The PSA sees the proposed reduction in rice tariffs to be implemented by July, but we estimate that the full impact will be observable in August, reducing rice prices by around P7 to P9 per kilogram,” the bank said.

Meanwhile, citing the PSA, Metrobank noted that the recently approved daily wage hike of P35 in the National Capital Region may have lag effects on services beginning September, particularly in selected commodity groups such as personal care, as well as restaurant and accommodation services.