As the risks to the inflation outlook continue to lean upward, the policymaking Monetary Board yesterday decided to keep the key rates of the Bangko Sentral ng Pilipinas (BSP) steady.
BSP’s Target Reverse Repurchase (RRP) Rate remains at 6.50 percent. The interest rates on the overnight deposit and lending facilities also remain at 6 percent and 7 percent, respectively.
Eli Remolona, BSP governor and Monetary Board chief, said “potential price pressures are linked mainly to higher transport charges, food prices, electricity rates, and global oil prices.”
“We are actually somewhat less hawkish than before, which means we could ease by Q3 or Q4 of this year. Possibly by August of this year,” Remolona said.
“There was a good (inflation) number in April, 3.8 percent is better than it looks because that included some positive base effects. There were other factors that were good news in terms of inflation,” Remolona said.
Faster price increases of food and non-alcoholic beverages, mainly due to El Niño and global disruptions, pushed inflation in April to its fastest in four months at 3.8 percent.
March inflation was at 3.7 percent. This brings the national average inflation from January to April to 3.4 percent, above the mid-range of the full-year target of between 2 and 4 percent.
Core inflation, which excludes selected food and energy items, slowed down to 3.2 percent in April from 3.4 percent in the previous month.
“The BSP’s latest forecasts indicate that inflation would settle close to the upper end of the target range,” Remolona said. He, however, stressed that inflation expectations “remain well-anchored.”
The inflation forecast for 2024 eased to 3.8 percent from 4.0 percent in the previous meeting. The inflation forecast for 2025, meanwhile, rose to 3.7 percent from 3.5 percent previously.
“The Monetary Board deems it appropriate to ensure sufficiently tight monetary policy settings until inflation settles firmly within the target range. A restrictive policy stance will also help keep inflation expectations anchored amid a possible buildup in upside risks to future inflation,” Remolona said.
Remolona also reiterated “the Monetary Board’s support for the national government’s non-monetary measures to address persistent supply-side pressures on food prices and to prevent further second-round effects.”
“Based on the latest GDP data, the expected path for domestic output growth over the medium term remains largely intact, even as recent indicators point to continued moderation under tight financial conditions. Moving forward, the BSP remains ready to adjust its monetary policy settings as necessary, in keeping with its primary mandate to safeguard price stability,” Remolona said.
Yesterday’s action was the fifth consecutive time that the Monetary Board decided to keep steady the key rates after the 0.25 off-cycle rate hike last Oct. 27, 2023.
Michael Ricafort, chief economist for the Treasury Group of Rizal Commercial Banking Corp., said “further local policy rate pause or cut (especially in 2024) could already be possible for the coming months.”
“(This comes) as fundamentally supported by the easing inflation trend as seen recently amid higher base effects; also as a function of future Fed rate pause or cut; also as a function of the behavior of the peso exchange rate, going forward,” Ricafort said.
“The latest pause in local policy rates came after the US central bank kept its key interest rates unchanged for the 6th consecutive meeting, at the 23-year high of 5.25 percent-5.5 percent target range on May 1, 2024. Any future possible Fed rate cut/s especially in the latter part of 2024, could be matched locally to maintain healthy interest rate differentials that also help stabilize the peso exchange rate, imports costs/prices, and overall inflation,” Ricafort said.
“Provided no escalation of geopolitical risks and the potential effects on world oil prices, also provided no large storm/El Niño drought damage that tends to increase food prices, headline inflation could still be well within the 2 percent-4 percent BSP inflation target in 2024,” Ricafort said.
“No surprises here,” said Aris Dacanay, HSBC economist for Asean.
“Despite the market’s repricing of the Fed rate cuts, the BSP didn’t need to follow the Bank of Indonesia who hiked its policy rate to help support the Rupiah. Not only does the BSP have an abundance of reserves, but it also has a good track record of defending the Peso and mitigating any volatility in the currency. Headline inflation in April also surprised to the downside and there was no urgent need for the BSP to hike its policy rate,” Dacanay said.
“We continue to expect the BSP to only cut after the Fed. Our baseline scenario is for the Fed to begin its easing cycle in 4Q 2024, starting with a 25bp rate cut. In this regard, we also expect the BSP to do its first 25bp policy rate cut in 4Q 2024 to 6.25 percent by year-end. This is roughly in line with Governor Remolona’s statement that the BSP will likely cut in the 2nd half of the year,” Dacanay added.
“All in all, macroeconomic conditions are becoming more and more balanced and the central bank’s ‘monetary policy freedom’ from the Fed is increasing. Although we don’t think the level of improvement is large enough for the BSP to cut ahead of the Fed, it may be enough for the BSP to keep its monetary stance steady if another episode of Fed repricing occurs,” Dacanay also said.
