Economists still expect the central bank’s Monetary Board will start easing the 6.5 percent policy rate by 25 basis points (bps) when it meets on Aug. 15 while a pause is unlikely especially since the US Federal Reserve may cut its own rates in September.
In a commentary, British bank HSBC said Wednesday, Aug. 7 that the spike in the July inflation of 4.4 percent versus June’s 3.7 percent due to supply-side factors as well as the rice tariff reduction which would increase rice supply do not build “a case big enough for a rate pause during the 15 August rate-setting meeting” of the BSP.
In addition, the core consumer price index (CPI) for July has cooled to 2.9 percent year-on-year. “That said, we also do not think there is enough concern on the demand-side that would build the case for a rate pause next week,” said HSBC analysts.
HSBC further noted that while a higher July inflation raises the upside risk of a rate pause for the Aug. 15 policy meeting, they project a 25 bps rate cut next week because the BSP – as it has signaled previously – will cut the policy rate ahead of the US Federal Reserve.
“Not only was the spike in inflation caused by a traceable event that affected the economy's supply, majority of the spike was also concentrated in just one region. The inflation outlook also remains favourable with the rice tariff rate cut expected to eventually cool prices significantly,” said HSBC.
Citi economist for the Philippines, Nalin Chutchotitham, agreed with HSBC that BSP will still decide to start easing next week despite the above-target July CPI which the market and the BSP had expected.
“While there remains some risk that the BSP could err on the safe side of inflation and delay its rate cut to October, we see higher probability that the BSP begins its gradual rate-cutting cycle in August, given high real policy rate, expectation of a lower inflation trajectory through 2025, and negative output gap estimate,” she said.
After the Aug. 15 policy meeting, the BSP will only have two scheduled meetings left, on Oct. 17 and Dec. 19. Any policy rate decisions will have to emerge from an off-cycle action outside of these scheduled rate-setting dates.
Chutchotitham expects the BSP to cut the key rate by 25 bps next week, to be followed by 25 bps each in October and December, for a total of 75 bps for 2024.
Meanwhile, analysts from Ayala-led Bank of the Philippine Islands (BPI) said the higher July CPI print could convince the BSP to not raise the benchmark rate in the next policy meeting.
“Nevertheless, we maintain our view that rate cuts are on the horizon given the favorable outlook for inflation,” said BPI.
It said the BSP’s decision next week “will also depend on the upcoming GDP data which could either prompt a delay in rate cuts if GDP exceeds expectations or justify an immediate rate cut if the data significantly misses the forecasts.”
For Chutchotitham, she expects a "substantial slowdown" in the second quarter GDP to "support its outlook" of a rate cut next week.
BSP Governor Eli M. Remolona Jr. said it himself that a policy rate move will have to depend not just on the latest CPI number but also the result of the second quarter GDP report which will come out on Thursday.
BPI noted that the BSP “will likely prioritize domestic data in its policy decision” however it may “also consider global developments.”
“Any signals from the Federal Reserve suggesting a substantial rate cut in September could increase the chances of a rate cut from the BSP in the next policy meeting," said BPI.
The BSP expects the inflation path will return to within the two percent to four percent target range this month after July’s 4.4 percent rate which was due to base effects.
The BSP predicted July inflation will range from a low of four percent to a high of 4.8 percent. With the latest CPI, the year-to-date average is at 3.7 percent, still within the BSP target band.
The BSP had anticipated that CPI will be above-the-target until July as constraints to domestic supply added pressures on the prices of key food items such as rice and corn while noting positive base effects from the decline in the food and energy inflation in the same period last year.
After July, the BSP said inflation is projected to return to within the target range as pressures on food and crude oil prices start to ease.
Remolona has said that the Monetary Board could consider reducing the target reverse repurchase or RRP rate by 50 bps this year and as much as 100 bps in 2025 but this will depend on the GDP outturn.
He also said they will implement a rate cut ahead of the US Fed which he expects will make a move in September.