The Philippine central bank is seen to pause its tightening cycle amid slowing inflation. — PHILIPPINE STAR/MICHAEL VARCAS
By Keisha B. Ta-asan, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) is widely expected to maintain the key benchmark interest rate at 6.25% on Thursday, amid easing inflation and slowing economic growth.
A BusinessWorld poll last week showed 13 out of 18 analysts anticipate the Monetary Board will pause its tightening cycle at its May 18 meeting.
If realized, this would be the first time the BSP will leave interest rates untouched since it began hiking in May 2022.
Meanwhile, five economists see the BSP hiking borrowing costs by 25 basis points (bps), before pausing at its June 22 meeting.
According to most analysts, the BSP has done enough in taming inflation which has decelerated steadily from the peak of 8.7% in January.
“I’m expecting the Board to pause next week, in view of the more favorable inflation numbers over the past few months, which show clearly that the worst of the surge is finally over,” Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said in an e-mail.
Inflation eased for a third straight month in April, slowing to 6.6% from 7.6% in March. However, it marked the 13th straight month that inflation breached the central bank’s 2-4% target.
For the first four months of the year, the consumer price index averaged 7.9%, still above the BSP’s 6% full-year forecast.
“(The) improvement in the inflation rate, especially the last two months which have shown contractions on a monthly basis, will be key factors in the BSP’s decision,” Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp., said.
Month on month, inflation inched down by 0.2% in April. Stripping out the seasonality effects on prices, April’s inflation steadied at zero percent, month on month from March.
Philippine economic growth is also slowing down, which strengthens the case for the BSP to pause, analysts said.
“A slower first-quarter GDP (gross domestic product) will further help argue for a pause in the policy rate,” Mr. Ella added.
In the first quarter, GDP expanded by 6.4%, marking the slowest pace in two years. While this is lower than the revised 7.1% growth in the previous quarter, GDP growth settled within the government’s 6-7% target for the year.
“At 6.4% year on year, first-quarter GDP growth has started to normalize to its pre-pandemic trajectory, signaling cooling demand and broadening growth challenges,” Debalika Sarkar, economist at ANZ Research, said in an e-mail.
However, the lagged effects of the central bank’s cumulative rate increases will be fully felt this year, as the impact of policy tightening is usually seen in 12 months, China Banking Corp. Chief Economist Domini S. Velasquez said.
“Hence, the BSP may want to keep interest rates at a level supportive to economic growth to help reach the government’s 6-7% target this year,” Ms. Velasquez said in an e-mail.
Since May 2022, the Monetary Board has raised borrowing costs by 425 bps to 6.25%, the highest in nearly 16 years.
HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris Dacanay said the BSP can still hike by 25 bps before keeping rates on hold throughout the year.
“With demand still strong, price pressures still evident, and inflationary risks still heavily tilted to the upside, the BSP will likely err on the side of caution and hike rates to 6.5% to manage price pressures in core. Tightening the monetary reins further shouldn’t be an issue since we think financial stability concerns are only minimal,” he said.
Other analysts believe that taming elevated core inflation and further anchoring inflation expectations are enough reasons for the BSP to raise rates on Thursday.
“We are expecting another 25-bp hike from the Monetary Board and will pause and hold after. This particular hike takes into consideration persistently high core inflation,” Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said in an e-mail.
Core inflation, which excludes volatile prices of food and fuel, slightly slowed to 7.9% in April from 8% in March, which was the highest since the 8.2% print in December 2000.
However, core inflation will soon likely follow the headline print amid fading second-round effects, Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, said in an e-mail.
“With inflation trending lower and the cumulative lagged impact of past monetary tightening still working through the pipeline, BSP will refrain from relentless hiking especially with data confirming softening price pressures and fading demand,” he said.
Mr. Mapa said the Monetary Board will keep rates at “an already elevated” 6.25% amid clear signals from the BSP chief.
BSP Governor Felipe M. Medalla earlier said the Monetary Board will consider a pause on Thursday if April inflation slows further.
Finance Secretary Benjamin E. Diokno, who is also a member of the Monetary Board, said he’ll be voting for a pause.
“We’re not thinking of further rate hike,” Mr. Diokno told reporters on Friday. “Inflation is going down… Overall, jobs market is fine, revenues are up, so there’s no reason why we should increase rates.”
However, Alvin Joseph A. Arogo, economist from the Philippine National Bank, noted that an untimely pause may “do more harm than good.”
“Furthermore, not matching the Fed’s 25-bp hike this month will lower the interest rate differential and could lead to another round of pressure for the peso to weaken,” Mr. Arogo said in an e-mail.
The US Federal Reserve delivered a 25-bp rate hike at its policy meeting earlier this month. It has now raised borrowing costs by 500 bps since March last year, bringing the Fed funds rate to 5-5.25%.
“We still think there will be another 25 bps before the bank joins other regional central banks in pausing, given elevated price levels and as a precautious measure after the US Fed hiked earlier this month,” Makoto Tsuchiya, assistant economist at Oxford Economics, said in an e-mail.
Mr. Tsuchiya added that if the BSP hikes by 25 bps on Thursday, the key policy rate will likely stay at 6.5% for the rest of the year, before the Monetary Board starts cutting by early next year.
“With regards to the interest rate differential, Fed Chair [Jerome H.] Powell has signaled a possible pause and current market expectation is a no-hike at the Fed’s June meeting. This keeps a decent 100-bp interest rate differential between the Fed and the BSP,” Ms. Velasquez said.
Market players are expecting the Fed to start keeping rates on hold at its next meeting on June 13-14.
But if the narrower interest rate gap results in excessive peso depreciation against the dollar, Ms. Velasquez said the BSP has an adequate level of foreign reserves that could help mitigate the volatility in the foreign exchange market.
The country’s gross international reserves stood at $101.511 billion as of end-April. This is lower than the $101.55 billion posted at end-March and the $105.4 billion in the same month last year.
While the BSP will likely pause this week, some analysts said the Monetary Board may still tighten policy in the next few months given possible inflation risks.
Security Bank Corp. Chief Economist Robert Dan J. Roces said cooling inflation pressures may encourage the BSP to potentially “pause” on Thursday, but not a “hold.”
“A pause and not a hold — meaning it might not declare the end of the tightening cycle just yet — as it considers more data given emergent risks to inflation,” he said.
Moody’s Analytics economist Sarah Tan noted that a pause may only be temporary, as core inflation has not slowed significantly.
“An elevated core inflation signals that underlying inflation expectations are not yet firmly kept in check,” Ms. Tan said.
The impact of El Niño could also hurt crop production and keep inflation elevated for longer, she said.
“Together, that could push the BSP to deliver at least one more rate hike this year,” she added.
On the other hand, Mr. Chanco sees the BSP keeping policy rates on hold until the third quarter this year, before unwinding its “overly aggressive” rate hikes in the fourth quarter.
Policy rate cuts may also happen as early as late third quarter this year, where the country’s inflation rate should be close to 4%, Mr. Ella said.
Mr. Medalla earlier said inflation will likely ease towards 2-4% by the fourth quarter of this year.
The BSP projects full-year inflation to average at 6%, before slowing to 2.9% in 2024. — with inputs from Luisa Maria Jacinta C. Jocson