With easing inflation, the Bangko Sentral ng Pilipinas (BSP) has more leeway to tweak the overnight target reverse repurchase (RRP) rate in the first six months of 2024, according to economists and market analysts.
HSBC Global Research, with its ASEAN economist Aris Dacanay, said while inflation is now less of a concern, there is still the worry about the yield differential from the US Federal Reserve. With this in mind, the British bank said it expects the BSP will begin its easing cycle alongside the Fed in the second quarter of this year.
For Citi economist Nalin Chutchotitham, the BSP could still decide to keep the current 6.5 percent target RRP rate or the policy rate in the first half of 2024 and then proceed to rate cuts in the third quarter.
She said a hold position for the first six months will “help anchor inflation at around the mid-point of the policy target.”
“We expect gradual rate cuts from Q3’24 (third quarter) onwards as inflation shows a steady declining trend,” said Chutchotitham, adding that the BSP will be comfortable at maintaining at least a 50 basis points (bps) interest rate differential with the Fed. The interest rate spread is currently 100 bps.
She said 50 bps spread will ensure a peso-US dollar exchange rates’ stability. “We forecast RRP rate at 5.50% at end-2024, and at 4.50% at end-2025,” she also said.
Meanwhile, HSBC said it bodes well that after 20 months of rising above the BSP's target range of two percent to four percent, the headline consumer price index (CPI) is finally within target, decelerating to 3.9 percent year-on-year in December 2023. This was lower than 4.1 percent in November.
Core CPI, which is minus volatile items such as food and energy, also eased for the ninth consecutive month to 4.4 percent from 4.7 percent in November.
“Now the main question is, will inflation stay within target? We think it will, except in 2Q 2024 when unfavourable base effects come into play. But once these base effects wear off, we expect headline CPI to immediately ease on a year-on-year basis and average within 3.0-3.5% in 2H 2024,” said HSBC.
All things considered, HSBC said BSP “has more leg room to adjust monetary policy with the inflation outlook more benign.”
“The larger concern now is the differential between BSP and Fed rates. Cutting ahead of the Fed may risk introducing volatility to the peso, which, in turn, can stoke inflation. Given this, we expect the BSP to cut its policy rate and reserve requirement ratio only when the Fed begins its easing cycle, which we expect to happen in 2Q 2024,” the bank noted.
In its own assessment, the central bank said the latest inflation outturn is consistent with the BSP’s forecast path which suggests that inflation will continue to moderate in the coming months as a result of easing supply-side price pressures and negative base effects.
“Looking ahead, the Monetary Board deems it necessary to keep monetary policy settings sufficiently tight in the near term to better anchor inflation expectations and mitigate second-round effects. The BSP will also continue to monitor price developments and will take appropriate action as needed to secure the inflation target over the medium term, in keeping with the BSP’s price stability mandate,” said the BSP.
BSP Governor Eli M. Remolona Jr. has said that they will consider an easing of monetary policy stance when the CPI is firmly within the mid-range of the target or around three percent.
For 2024, the risk-adjusted BSP inflation forecast is 4.2 percent and 3.4 percent for 2025. Risk-adjusted inflation forecasts take into consideration events or factors that are expected to happen at some point in time.
Remolona said last month that it will be “unlikely to cut rates in the next few months” since BSP is still on a hawkish “high-for-longer” policy stance. “When I say hawkish it means high-for-a-while,” he said.
For the first quarter 2024, he reiterated that BSP forecasts inflation will go below two percent based on base effects, but come the months of April to July – also because of base effects – inflation will rise above three percent.
“But for the year as a whole, we hope we will be within the target range, closer to the middle (mid-range) of the target. Closer to 4% than to 3% for the year as a whole,” he said.
Upside risks to inflation still persists such as higher transport fares, higher electricity and oil prices, and a higher-than-expected minimum wage adjustments in the National Capital Region.
The effects of El Niño weather conditions also continue to be a potential supply-side pressure to inflation.
“El Niño is a supply shock and if its impact is very large, then it will affect monetary policy. But if it’s smaller than we think, we tend to look through that supply shock,” said Remolona.
“We’re still not out of the woods when it comes to inflation,” he added.