Analysts see room for postponement of the interest rate cut

By means of Luisa Maria Jacinta C. Jocson, News reporter

The Bangko Sentral ng Pilipinas (BSP) still has room to delay monetary easing, analysts said, noting that the Philippine economy is still resilient to “longer” interest rates.

“The economy is strong enough to withstand the BSP’s current policy rate of 6.5%. It would be helpful if we see banks conducting less pro-cyclical credit operations to help avoid a convergence between business and the economy. fifinancial cycles and lower credit and economic growth,” GlobalSource country analyst Diwa C. Guinigundo said in a Viber message.

The Monetary Board met for the fourth consecutive time on Monday and kept the benchmark interest rate at a 17-year high of 6.5%.

BSP Governor Eli M. Remolona Jr. has said that upside risks to inflation have “increased,” prompting the central bank to be “slightly more aggressive than before.”

Interest rate cuts would only be considered if successfulFThe downward trend will continue and if economic growth turns out to be weaker than expected, he added.

HSBC ASEAN economist Aris D. Dacanay said in a report that the BSP has room to keep its policy rate tight for longer.

“With growth in the Philippines very resilient, we believe the BSP can afford to delay growth fifirst rate cut if necessary to support the peso or further cool inflation,” he said.

The BSP chief said it could cut rates by 25 basis points (bps) in the third quarter if inflation remains within target and economic growth is weak. However, he warned that monetary easing could not begin until 2011 fifirst quarter of 2025 if inflation risk persists.

“I am in favor of the BSP’s continued patience, because we have seen in the past how high inflation can also undermine economic growth through lower consumption and investment, and undermine purchasing power, especially of the bottom 30% of our population,” said Mr. Guinigundo.

Mr Remolona also said previous interest rate hikes have depressed domestic demand and had a delayed effect on the economy.

The Philippines’ gross domestic product (GDP) stood at 5.5% last year, slower than 2022 growth of 7.6% and behind the government’s target of 6-7%.

Mr Remolona said GDP growth could average 5.9% this year, slightly lower than the government’s revised target of 6-7% for 2024.

“Although growth is threatened, policies do not necessarily have to limit growth. The crucial factor is how both the private and public sectors will respond to the policy,” Ateneo de Manila economics professor Leonardo A. Lanzona said in an email.

“In a sense, the BSP is forcing the government to use all the resources it has more productively so that the economy is pushed towards greater production, not just in agriculture but in all other sectors,” he added.

Mr. Lanzona said controlling inflation expectations “stifles aggregate demand, forcing both private and public spending to remain low.”

CRUCIAL GDP DATA FOR THE FIRST QUALITY
Makoto Tsuchiya, economist at Oxford Economics, said the results of fiThe first quarter GDP data will be critical to the BSP’s decision on whether to extend the pause.

“If domestic demand holds up well or if the country’s electronics sector benefitsfi“If we experience more of the AI ​​chip boom than we expect, this will give the BSP room to remain patient until the third quarter before the rate cut cycle kicks in,” he said in a commentary.

First quarter GDP data is expected to be released on May 9.

Pantheon Macroeconomics said there is potential for rate cuts even before the third quarter, against the backdrop of expected weaker growth.

“(Mr Remolona) also suggested that activity would have to disappoint significantly for cuts to come into play before the third quarter. Needless to say, we think such a downside surprise is inevitable as our growth forecast for 2024 is 4.6%,” said the report in the Emerging Asia Economic Monitor.

“Domestic demand continues to weaken year on year, with no momentum at best since early 2024,” it added.

Jonathan L. Ravelas, senior advisor, professional services fiRm Reyes Tacandong & Co. said there is a chance the BSP will not make any cuts at all this year due to persistent inflation.

“With upside risks to inflation remaining, the BSP is likely to keep rates high for a while longer. I’m looking at the top two cuts this year. “But if inflation remains persistent due to El Niño concerns, I would not be surprised if the BSP does not cut spending at all,” he added.

The BSP raised its risk-adjusted and baseline inflation forecasts this year to 4% and 3.8% respectively, up from 3.9% and 3.6% previously.

Mr Guinigundo said it may be too early for the BSP to start cutting rates by the third quarter.

“We are not surprised, as we wrote before, that the June rate cut is too early, while a cut in the third quarter could even be optimistic given all the red flags we still see today,” he said.

“Given upside domestic inflation risks and the likelihood that the US Fed could slow its easing cycle, the risk for BSP is tilted towards a later start of rate cuts,” Mr Tsuchiya added.

Bank of America Global Research said inflation could average above 4% in the second quarter, which could prevent a rate cut in June.

“We now believe that the BSP will cut its policy rate no earlier than August 2024 and cut further in October and December, up to a total of 75 basis points,” the report said.

ANZ Research said it expects the central bank to take a wait-and-see approach until economic data “becomes favorable for a rate cut.”

“Consumer credit continues to grow at double digits, demonstrating the resilience of Philippine households despite the sharp increase in interest rates,” it added.

Mr Dacanay said inflation could exceed the central bank’s 2-4% target until August this year before returning to target, which would then give it an opportunity to loosen monetary reins.

“Our base case is that the BSP cuts rates by 25 basis points to 6.25% in the third quarter of 2024, and then by 50 basis points to 5.75% in the fourth quarter of 2024,” he added.