The central bank’s Monetary Board is expected to leave benchmark rates unchanged when it meets on Thursday, Aug. 17, amid lingering concerns of slowing growth and upside risks to inflation, especially from oil price surges.
Moody’s Analytics, in its weekly Asia Pacific Economic Review, said the Bangko Sentral ng Pilipinas (BSP) will likely hold its current key rate of 6.25 percent this week. It noted that the “Philippine economy disappointed on a few scores in the second quarter” with a lower-than-anticipated GDP growth of 4.3 percent versus 6.4 percent in the first three months of 2023.
Chief economist Robert Dan Roces of Security Bank Corp. (SBC), also forecasts a “long hawkish hold” from Aug. 17 due to lackluster growth.
However, if the exchange rate is at risk due to inflation reacting to sharp oil price hikes, he said the BSP will have to raise rates anew in the next policy meetings.
On a possible rate cut, Roces echoed what other analysts have said that the BSP will only reduce the policy rate once the US Federal Reserve cut its own rates, since the BSP has the “least monetary policy freedom to diverge from the Fed.”
SBC expects BSP to cut rates at the end of the second quarter of 2024 to early third quarter next year.
Meanwhile, Roces said a lower second quarter GDP “does not necessarily rule out another hike” but for now, the BSP and the government are managing upside pressures to inflation such as demand-driven pressures, wage hikes, peso-US dollar issues, and increasing food and fuel prices. “Most of these pressures remain contained and allows an assessment by the BSP,” he said.
HSBC economist Aris Dacanay, for his part, pointed to the same factors why the market expects the BSP to hold the policy rates this week.
“Concerns to bring the policy rate down have emerged with 2Q 2023 (second quarter) growth significantly surprising to the downside at 4.3% y-o-y, far below the historical average of 6.3%,” said Dacanay.
He noted that inflation, while still above-target in July at 4.7 percent, has been on a consistent downward path since February this year. However there are a lot of upside risks that could “put rate hikes back on the BSP's table.”
Besides rising costs of fuel, the rice export prices is another concern, despite the Rice Tariffication Law which has been managing rice prices since it was enacted into a law.
The exchange rate is another issue that BSP has to watch out for, especially if the interest rate differential between the US Fed and the BSP rate narrows further, said Dacanay.
“The thought of these opposite forces might be somewhat stressful, but in reality, we think the BSP is comfortable with where monetary policy is now at 6.25%,” he said.
He added, that despite the challenges in growth, “we continue to expect the BSP to maintain the policy rate at 6.25% and only cut rates after the Fed cuts its own. Since our baseline view is for the Fed to cut in 2Q 2024, we expect the BSP to begin its easing cycle in 3Q 2024.”
The BSP has maintained the current rate of 6.25 percent for the past two meetings in a row based on its overall assessment that inflation will gradually decline within the target range by the last quarter of the year.
However, the balance of risks to the inflation outlook continues to lean towards the upside due to the potential impact of additional transport fare increases, higher-than-expected minimum wage adjustments in other regions, persistent supply constraints of key food items, El Niño weather conditions, and possible knock-on effects of higher toll rates on prices of key agricultural items.
The BSP as forward guidance said that it is prepared to adjust the monetary policy stance as necessary to prevent the further broadening of price pressures as well as the emergence of additional second order effects in view of the persistent upside risks to the inflation outlook.