BSP to pause after Q1, will cut rate in 2024 – Citi

The Bangko Sentral ng Pilipinas (BSP) is expected to stop its policy rate hike at six percent this quarter and will only cut and bring back the key rate to about four percent by end-2024, according to US banking giant Citi.

In a press briefing Wednesday, Feb. 1, Citi Philippines announced that with a strong fourth quarter 2022 GDP growth, they think the economy can comfortably grow by 6.2 percent this year, below the government’s mid-term target of 6.5 percent to eight percent, and also lower from 2022’s 7.6 percent growth.

Citi economist Nalin Chutchotitham said the frontloading of aggressive rate hikes in 2022 by the Bangko Sentral ng Pilipinas (BSP), which raised the key rate by a cumulative 350 basis points (bps) to 5.5 percent, will start to impact on domestic demand growth in the first six months of 2023 when inflation is still on the high side, or above seven percent in the first quarter alone after reaching its peak in December of 8.1 percent.

“We do expect another 50 bps hike to come from the BSP, ending up at six percent this year (and that) will be happening by the first half of the year. We’re expecting another 25 bps hike in the February (Feb. 16) meeting,” Chutchotitham told reporters before Citi’s annual 2023 Economic Briefing on the global, Asia and Philippine outlook on Wednesday.

She said the rate hikes will tackle inflation pressures that remains broad based and should help anchor inflation expectations in 2023 and 2024. For this year, Citi forecasts average inflation of 5.3 percent, lower than actual 2022 average of 5.8 percent.

For 2024, they expect inflation to fall to 3.3 percent. “But, there are upside risks and the BSP could do more (than 50 bps) if inflation prove to be a little bit more persistent than what we’re currently pricing in,” said Chutchotitham.

However, given the US Federal Reserve’s forward guidance of a slower pace of rate hikes and a possible rate reduction in 2024, Citi also expects the Philippines to mirror US rates and will cut its own policy rate next year.

“At the end of next year, we’re expecting some policy rate decline, potentially down to four percent and that will help the overall financing costs as inflation is also expected to return to target next year,” she added. She also expects domestic liquidity to remain sufficient to continue to support further economic growth while inflation is seen returning to the two percent to four percent target by early fourth quarter or by October this year.

Chutchotitham said that based on historical records, the country’s real policy rate at one percent to two percent is restrictive enough to help curb inflation expectation and also inflationary pressures. “That’s why the six percent nominal policy rate is sufficiently high,” she said.

As for the peso-US dollar rate, the Citi economist said that in the next three months, she sees some weakness at the P56.50 range. “Since the Fed has not finished its rate hike, we do expect maybe the dollar can maintain its strength for the near term. For the longer term, for six to 12 months time, we are actually looking at P54, it’s a clearer appreciating trend reflecting the end of the Fed’s rate hike, continued strong Philippine economy and narrowing of the current account deficit as well this year,” said Chutchotitham.

Head of Citi Asia Economics and Strategy, Joanna Chua, meanwhile, said on a relative basis, the peso versus the US dollar has underperformed. “Peso is appreciating versus the dollar but relative to some of the Asian currencies, it’s actually relatively a more modest appreciation. So it’s a relative underperformance to others,” she said.

Paul Favila, Citi Philippines Markets Head and Country Treasurer, said generally, as far as the Philippine market is concerned – “much of the turmoil is behind us (and the) aggressive and bold actions by the central bank have a lot to do this.”

“Clearly we are seeing a lot more stability in the currency and even in the outlook so I suspect that in the next few months, we should still see a fair bit of strengthening from the currency, subject to (some) volatility but the general trend is the peso would be relatively stable,” said Favila, adding that “there is scope for further strengthening of the peso over the next year primarily because the US may come to a point where it may pause and lead to a weaker US dollar.”

Chua, discussing the broader regional perspective, expects that most Asian central banks will still tighten monetary policies but could reach the peak around the second quarter of this year. “The only caveat to this end of the tightening cycle is that the risk now that central banks may have to be on hold or stay tight for longer is maybe the risk relative to what the market is expecting,” she said.

Chua said there could be tightening much longer if China reopens much faster than expected, or there is reflationary impact of China reopening. Also, global growth may not be as bad as expected which will make central banks more dovish, and on top of that, she said the labor market in the US is still tight, and global financial conditions are not tightening dramatically which could then lead to central banks staying on the hawkish side.

There are still risks to a global recession, but Chua said the chance of that happening is just 30 percent, compared to last year’s forecast of a 50-50 probability.

Meanwhile, Chua said there are three risks that all central banks will have to contend with, and these are inflation, the slowing growth, and the threat of geopolitical tensions.

“The market is pricing in a 50 bps cut in the Fed. We don’t expect the Fed to cut rates until 2024 so everyone in Asia is not going to start easing until 2024. Of course the market is forward looking, we will start anticipating that in the second half of this year and that will obviously create some room for the dollar to weaken which is good for inflation in this region,” said Chua.