Market analysts do not expect the Monetary Board, the Bangko Sentral ng Pilipinas’ (BSP) policy-making arm, to change its current 6.5 percent target reverse repurchase (RRP) rate when it meets for this year’s last policy meeting on Thursday, Dec. 14.
HSBC Global Research analysts and Security Bank Corp. senior economist Robert Dan Roces expect the BSP to keep its key rate untouched since BSP Governor Eli M. Remolona Jr. remains hawkish in his forward guidance.
Roces said his “no change” views are based on six factors. Firstly, he said the easing headline inflation is very convincing for a hold decision. The consumer price index (CPI) only reported 4.1 percent for November, lower than October’s 4.9 percent.
“This indicates a positive trend in inflation control,” he said.
The economist also cited core inflation which is still high. Core inflation, which excludes selected volatile food and energy items, is at 4.7 percent in November from 5.3 percent in October.
“Despite the easing headline inflation, core inflation remains elevated and above the headline. This implies that underlying inflationary pressures persist, requiring continued vigilance from the central bank,” said Roces.
Thirdly, he noted external factors such as “global economic uncertainties, (the) rising interest rates in major economies, and geopolitical events could dampen domestic economic growth.”
“This may incentivize the central bank to adopt a more cautious approach to monetary policy,” he added.
Roces said BSP’s effort to juggle growth and inflation continue to be challenging.
“The central bank faces a delicate balancing act between maintaining economic growth and controlling inflation. A pause in interest rate hikes may encourage investment and economic activity while monitoring the impact on inflation,” he said.
Roces said policy lag is another factor and that “interest rate changes typically take time to impact the economy (and) the central bank will want to assess the full effect of previous rate hikes before further adjustments.”
He also noted that fiscal policy coordination while “effective inflation control” has “often (required) coordinated efforts between monetary and fiscal policy.”
“The central bank may consider the government's fiscal policy plans before making any decisions on interest rates,” he added.
Roces echoed the BSP in saying that upside risks are persistent and are threats to the inflation medium-term outlook.
He said the “core and headline may rise in December as cost-push inflation factors – the main cause of elevated inflation - meets demand-pull from holiday spending. Thus, December inflation may slightly be higher on seasonality than November’s, to bring average inflation in 2023 to 6.0%.”
HSBC in its own commentary, said they think BSP will decide to be “confidently steady” on Thursday with inflation expected to ease to within the BSP's two percent to four inflation target soon, likely in December.
“We expect the BSP to keep policy rates steady (and this is) despite 3Q growth accelerating, the saving and investment gap narrowed, improving the economy's domestic balance,” said the British bank.
It added that with headline CPI “easing quickly to where the BSP wants it to be, the central bank is likely to - confidently - keep its policy rate steady at the last rate-setting meeting of the year on 14 December 2023.”
Meanwhile, HSBC sees a rate cut in the third quarter 2024.
“With upside risks to inflation still heavily tilted to the upside, it may still be too early to put rate cuts on the table. The economy will need time to pause, to ensure that the BSP's tight monetary stance filters through to the economy,” it said.
HSBC added that “BSP (will) gradually begin its easing cycle after the Fed (US Federal Reserve) does its first rate cut in 3Q24.”
It noted that “by then, we expect headline CPI to be softening on a consistent basis. Cutting at the same rate as the Fed will also mitigate the volatility of the USD-PHP given how wide the current account deficit still is for the Philippine economy.”
BSP chief Remolona has already signaled that it is too premature for a rate cut and there are only two decisions they need to make this week: pause or rate hike.
“We could consider a pause or consider a hike. We have to assess the situation. I think it’s premature to say that we will start to ease,” he has said.
Remolona also said that they “don’t want to make any unnecessary tightening.”
“We want to make just enough tightening so that we get within the target range, and expectations remain anchored to our target. I am still hawkish,” he added.
Remolona said that before they could start thinking about a rate cut, they would “want to be sure we stay comfortably within the target range and then when we’re comfortable about that, then we can start to think about loosening (the policy rate).”
Year-to-date, the average inflation still stands at 6.2 percent, still above the government’s average inflation target range of two percent to four percent for the year.
While there are no more significant data or economic indicators that BSP is watching out for before the Dec. 14 policy meeting, Remolona is not keen on categorically stating that they will not move or change its monetary policy stance this week.