Economists expect the Bangko Sentral ng Pilipinas (BSP) will not to move benchmarks next Thursday during a monetary policy meeting, and will opt to keep the 6.25 percent policy rate for the rest of the year.
In its latest “Market Call” report, Metrobank subsidiary First Metro Investments Corp. (FMIC) and its research partner, the University of Asia and the Pacific (UA&P), said that with a lower inflation for the month of July, the BSP will likely not move key rates on Aug. 17.
“With inflationary pressures tapering, the BSP will likely keep policy rates unchanged in its August meeting. The peso has shown sufficient resiliency and does not necessitate an adjustment in policy rates,” said the FMIC.
The market is awaiting how the BSP’s Monetary Board will respond after the US Federal Reserve hiked its own rates at the end of July by 25 basis points (bps).
Generally, the market prefers an interest rate differential of 100 bps to 125 bps between US rates and BSP rates to prevent a volatile exchange rate. This volatility comes from a narrower interest rate differential.
Analysts from the Bank of the Philippine Islands (BPI) also expect the BSP will not move rates for quite a while as the inflation decelerates ever closer to the government target range of two percent to four percent. In July, the consumer price index (CPI) has dropped below five percent, although year-to-date it is still elevated at 6.8 percent.
“The current path of inflation gives the BSP the space to keep rates steady until the end of the year. So far, the probability of another hike is low, but it could go up depending on what the Fed will do,” said BPI.
It added that the US central bank “has not given a definite guidance on their future moves, but they have kept the door open for additional hikes if the data support this. But even if the Fed decides to keep rates steady, it might still be premature to expect rate cuts from the BSP this year (since) there are significant upside risks to inflation, and keeping rates at current levels might be necessary to mitigate the impact of these risks.”
As for the peso, BPI expect the exchange rate will “move sideways for now” amid improving imports, global financial market developments, and the central banks’ future policy move.
“The behavior of the local currency in 2023 may largely depend on what the Federal Reserve will do. Once the Fed is done hiking, the peso may strengthen as markets will likely assess the possibility of rate cuts. If a recession in the US happens, the Fed may cut its rates and the BSP will likely follow. But in this situation, the appreciation of the local currency will likely be smaller compared to other currencies given the still substantial current account deficit of the Philippines this year and in 2024,” BPI explained.
For the past weeks the peso has lounged at the P54 level but depreciated to the P55 range last week as the market has its own waiting game ahead of the Aug. 17 BSP policy meeting.
Last Aug. 4 though, BSP Governor Eli M. Remolona, in an interview with CNN Philippines, said that because of new price pressures brought on by bad weather conditions, they might also consider a rate hike as soon as next week.
Remolona also said that despite the decelerating CPI, the BSP is more likely to raise its benchmark rates rather than cutting it.
The July CPI declined to 4.7 percent from 5.4 percent in June. This was the sixth consecutive month that inflation has declined since its peak in January of 8.7 percent. The July turnout was also within the BSP’s forecast of 4.1 percent to 4.9 percent.
The BSP said the July CPI is consistent with 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 likewise 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.”
The BSP is projecting that inflation will further drop to 4.6 percent by the third quarter and three percent by the fourth quarter of 2023.