Philippines Central Bank Held Rates at 6.25% with Stable Peso and Downward Inflation Trend

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP), Philippines central bank held rates at 6.25%. Rates at their August meeting, the highest since the 7.50 percent logged in May 2007. Since it started raising interest rates in May last year, the BSP has so far increased key policy rates by 425 basis points (bps), making it the most aggressive central bank in the region. BSP Governor Eli Remolona Jr. said “monetary authorities are ready to respond as necessary to safeguard the inflation target of two to four percent.” Inflation averaged 5.8 percent from January to July, still above the BSP’s two to four percent target range.

Illustration: David Simonds/Observer

Today’s decision extends the BSP’s “prudent pause” to three meetings and we could see BSP on hold for a couple of more meetings if inflation continues to moderate and head closer to target. BSP expects inflation to settle within its target band as early as September, although the central bank did indicate that risks to the inflation outlook remain tilted to the upside.

“We expect the policy rate to be held unchanged for the remainder of the year, with odds of further tightening back on the table if the US Fed follows-through with a hike in Septeber and October,” Economist Rao said.

Inflation

  • BSP raised its inflation forecasts to 5.6 percent for this year, 3.3 percent for 2024, and 3.4 percent for 2025
  • Due to rising global oil prices, higher-than-expected wage adjustments and the recent developments in the peso-dollar exchange rate.

A looming bout with El Niño (the unusual warming of the eastern Pacific Ocean which subsequently drives surface air temperatures and pressure changes throughout the equator) could force food prices higher, and thus BSP has left the door open for further tightening if warranted.

Bank of the Philippine Islands lead economist Jun Neri said in the past supply remains the major source of inflation.

Supply Shock Risk

“The supply shocks can have their effects on expectations. And so we try to moderate those shocks by working on the demand side for the same commodities and for a broader range of commodities. So it’s a balancing act. We try to figure out how strong the lagged effects are and how expectations are evolving,” Remolona said.

The BSP Governor said the consumer price index (CPI) is more subject to demand or to the tightening of monetary policy.

“And so that effect seems to be working with a long lag, but nonetheless we think we are now within the striking distance of the target range. So we think we will be within the target range by the end of this year and certainly by 2024 and 2025,” Remolona said.

Peso

DBS Bank senior economist Radhika Rao said the post-decision commentary of the BSP governor was geared toward highlighting pipeline risks, including the recent climb in global energy and food prices, particularly rice, as well as domestic catalysts like transport costs, minimum wage increases, utilities and a weaker peso.

“Against this backdrop, the governor reiterated his readiness to hike rates anew if the data so warranted,” Rao said.

Deputy Gov. Dakila has signaled in the past that the central bank could intervene to support the peso,

“The [central bank] stands ready to participate in the foreign exchange market only to ensure orderly market conditions and to reduce excessive short-term volatility in the exchange rate,” he has said.

Dakila in a previous interview said the potential impact of higher global oil prices, petitions for further transport fare hikes, weather disturbances affecting food prices, and a sharp increase in the price of sugar all remain. He said the latest rate hike should “help alleviate some pressures” on the peso, even though the increase is smaller than the U.S. Fed’s latest adjustment.

BMI, a unit of Fitch Solutions cautioned the Philippine central bank on the timing of cutting policy rates. (Updated)

In a commentary released Friday following the announcement of the Monetary Board on Thursday to maintain policy rates, BMI said rate cuts should be considered only when food prices have already stabilized.

Likewise, BMI added that the Bangko Sentral ng Pilipinas (BSP) should only continue with interest rate reductions when major central banks across the world have also eased their monetary policy, which is seen to be happening by the second quarter next year.

“With clear risk to inflation outlook and the external sector under pressure, policymakers will likely keep financial conditions very restrictive for a while longer. This feeds into our expectations for rate cuts to materialize only in Q2 2024,” BMI noted.

BMI’s inflation forecast for the country is at 4 percent by the end of 2023.

However, risks to inflation remain high with the onset of El Niño, which is seen to intensify between the fourth quarter of 2023 and the first quarter of 2024, which could threaten food prices.

The depreciating peso is also seen to be a risk to inflation as the country is a net importer.

The peso has already weakened by 1.9 percent against the US dollar year-to-date.

“Policymakers will be cautious about exacerbating further weakness in the peso, especially given that the US Federal Reserve has not completely closed the door on further tightening–a key risk that we have been highlighting,” BMI said.

Source: TC PNA

From The TradersCommunity Research Desk