By Keisha B. Ta-asan | BusinessWorld
May 19, 2023
THE BANGKO SENTRAL ng Pilipinas (BSP) paused its aggressive monetary policy tightening campaign, and signaled the policy rate will remain unchanged at its next two to three meetings as inflation continues to ease.
At its policy meeting on Thursday, the Monetary Board kept its benchmark interest rate unchanged at 6.25% as expected by 13 of 18 analysts in a BusinessWorld poll last week.
Interest rates on the overnight deposit and lending facilities were also maintained at 5.75% and 6.75%, respectively.
This is the first time the Monetary Board left rates untouched after nine meetings. Since it began its aggressive monetary tightening cycle in May 2022, the BSP has raised borrowing costs by a total of 425 basis points (bps).
“The Monetary Board deems it prudent for the BSP to take a pause in monetary policy tightening while remaining ready to respond to emerging threats to inflation,” BSP Governor Felipe M. Medalla said during a briefing on Thursday.
The BSP’s decision to pause its most aggressive monetary policy tightening in two decades comes after inflation slowed in April for a third month in a row, and economic growth showed signs of moderation.
Mr. Medalla noted the BSP’s latest baseline projections reflect a “gradual return of inflation to the target band of 2-4%” by the third quarter.
The BSP lowered its average inflation forecast for 2023 to 5.5%, from the 6% it gave in March. This is still beyond the BSP’s 2-4% target range.
For 2024, the BSP also trimmed its average inflation projection to 2.8% from 2.9% previously.
“The downward revisions for 2023 is mainly due to the lower-than-expected inflation for March and April, slower domestic and global growth outlook, and the impact of the additional 25-bp increase back in March by the BSP,” BSP Monetary Policy Sub-Sector Officer-in-Charge Dennis D. Lapid said.
While headline inflation has continued to decelerate, Mr. Medalla said core inflation has only eased marginally.
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 December 2000.
“In addition, the balance of risks to the inflation outlook remains largely tilted towards the upside owing to persistent constraints in the supply of key food items, the potential impact of El Niño on food prices and utility rates, as well as the effects of possible additional adjustments in transportation fares and wages,” Mr. Medalla said.
While gross domestic product (GDP) grew by 6.4% in the first quarter, Mr. Medalla said “demand indicators have also pointed to a potential moderation in the recent months, suggesting that previous policy rate increases by the BSP continue to work their way through the economy.”
The first-quarter GDP print was the slowest growth in two years but within the government’s 6-7% target for the year.
“The Monetary Board also deems it necessary to keep the policy interest rate at its current level over the near term, as ongoing price pressures continue to warrant close monitoring. A prudent pause also allows monetary authorities to further assess how macroeconomic and financial conditions will evolve in view of tighter global financial conditions,” Mr. Medalla said.
He said the Monetary Board’s next policy decisions would depend on inflation data and the US Federal Reserve’s next policy moves.
“The more likely scenario is, neither an increase nor a cut in the next two or three policy meetings. A pause for two or three policy meetings is a more likely scenario,” Mr. Medalla said.
The next three policy meetings are scheduled on June 22, Aug. 17 and Sept. 21.
As the BSP forecasts inflation to fall within the 2-4% target range by September, the BSP chief said another rate hike is unlikely unless there is a new supply shock or a rise in inflationary expectations.
“If the current forecast is maintained, we are unlikely to raise but at the same time, we’re also reluctant in cutting. The problem is, if the US [Federal Reserve] is raising policy rates and we are cutting, the market seems to see that as a trigger for a significantly weaker peso,” he said.
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%. The Fed is set to meet on June 13-14.
Mr. Medalla said the BSP sees the US Fed to either continue its policy tightening at its next meetings or start cutting policy rates late in the year.
Meanwhile, Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said the BSP may deliver 50-bp rate cuts in the fourth quarter this year.
“We doubt that Fed policy will be a barrier to BSP easing, however, as our house view is for the Fed to cut by 25 bps in the third quarter, before pursuing 50 bps more in the fourth quarter,” Mr. Chanco said in an e-mail.
He forecasts Philippine GDP growth to slow to 5.5% this year, from 7.6% in 2022.
For Capital Economics Senior Asia Economist Gareth Leather, the BSP may start cutting rates by early next year.
“The (BSP) statement was generally a little more hawkish than we had anticipated, with the central bank stating that the pause gives them time to assess how the economy is performing, but that further hikes cannot be ruled out,” Mr. Leather said.
ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the BSP opted to deliver a prudent pause, keeping policy rates high enough to tackle elevated core inflation while also refraining from raising interest rates due to the lower inflation forecasts for this year and 2024.
“We expect BSP to keep policy rates steady in the near term while standing ready to tighten further should inflation trends reverse,” Mr. Mapa said.
At the same time, Mr. Medalla hinted at a reduction in the reserve requirement ratio (RRR) of banks as early as June.
The RRR for big banks is currently at 12%, one of the highest in the region. Reserve requirements for thrift and rural lenders are at 3% and 2%, respectively.
The central bank targets to cut the RRR to single-digit levels by the end of the year.
A cut in RRR is a move intended to be an operational adjustment to facilitate the BSP’s shift to market-based instruments for managing liquidity in the financial system, particularly the term deposit facility and the BSP securities.