Inflation to peak in July, BSP to cut key rate in August – analysts

The country’s inflation is expected to climb to its highest or above four percent level in July which will prompt the central bank’s Monetary Board to reduce the target reverse repurchase (RRP) rate by 25 basis points (bps) on Aug. 15, according to Citi economist for the Philippines Nalin Chutchotitham.

In a commentary Thursday, June 6, she said they expect the Bangko Sentral ng Pilipinas (BSP) to cut the key rate by 25 bps in August, and during its policy meetings on Oct. 17 and Dec. 19, for a total of 75 bps.

Chutchotitham further predicted additional rate cuts of 25 bps or a total of 75 bps in February, May and August 2025.

“Our forecasts are based on assumption that the BSP would adjust policy stance to ensure that it is not too tight to support economic momentum, which was also highlighted by Governor Remolona that ‘in taming inflation, we don’t want unnecessary loss of output’.”

The Citi analyst also said that it its possible there will be a “rate-cut delay (given) that the Philippine economy maintains a healthy pace of growth.”

“While the governor (Eli M. Remolona Jr.) said the BSP could cut before the Fed (US Federal Reserve), he remained cautious, as reflected in the comments that 150bp cut in two years could be a bit too aggressive considering current growth trajectory, in opposition view to the Secretary of Finance who is also a Monetary Board member,” she added.

As for the peso-US dollar rate, Chutchotitham said in the event of what she called “high FX (foreign exchange) volatility, the BSP might also opt for delayed rate cuts to support the PHP (peso), especially if the Fed begins cutting later than July.”

Analysts from the Bank of the Philippine Islands (BPI) said the BSP – as signaled by Remolona himself – will keep a restrictive policy stance in the first six months of the year, which means when the Monetary Board meets on June 27, it will not change its current 6.5 percent RRP rate.

“The BSP will likely keep its monetary policy restrictive in the first half of the year as inflation risks seen to persist in the near term. Rate cuts may only be considered once inflation stabilizes within the BSP’s target range in the 3rd or 4th quarter,” said BPI.

The local bank reiterated that if the BSP cuts its policy rate ahead of the US, this will likely lead to a weaker peso.

As such, it still expects the BSP will reduce the key rate by 50 bps this year. This was also announced by Remolona earlier this week.

“If the BSP reduces its policy rate ahead of the Federal Reserve, a narrowed interest rate differential increases the risk of currency depreciation, which could outweigh recent deceleration in food prices. Moreover, the economy has been resilient despite the normalization of interest rates, with loan growth accelerating for the seventh straight month in April. We now expect a rate cut of around 50 bps this year,” it added.

As for the peso, BPI analysts said the local currency may appreciate in the second half of 2024, depending on when the US Fed will make its own policy move.

“It seems the peso has the tendency to strengthen when the Fed eases its monetary policy. However, while a Fed cut might lead to peso appreciation, its gains are likely to be smaller compared to other emerging market currencies given the substantial current account deficit of the country,” said BPI.

The inflation rate in May increased to 3.9 percent versus 3.8 percent in April. The BSP said they expect the consumer price index to be above the two percent to four percent target in June and July.