BSP stands firm and signals interest rate cut in August

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

THE BANGKO SENTRAL ng Pilipinas (BSP) kept interest rates at the same level stable for a sixth consecutive meeting on Thursday, but indicated that a rate cut at the next meeting in August is “slightly more likely than before”, with an easing to 50 basis points (bps) likely this year.

The Monetary Board on Thursday left its target reverse repurchase rate unchanged at 6.5%, the highest level in more than 17 years. This was in line with the expectations of all fifteen analysts in one Business poll from last week.

The interest rates on overnight deposits and credit facilities were also maintained at 6% and 7% respectively.

Mr Remolona said he expects inflation to decline further in the second half due to the introduction of lower tariffs on rice.

“The balance of risks to the inflation outlook has shifted downward for 2024 and 2025, largely due to the impact of lower import tariffs on rice under Executive Order (EO) No. 62,” he said at a press conference.Fing.

“If the improvement in inflation prospects continues, there would be more room to consider a less restrictive monetary policy.”

President Ferdinand R. Marcos, Jr. signed EO 62 earlier this month, which cut tariffs on rice imports to 15% through 2028 to dampen rice prices.

Mr Remolona said thatFThe economy is moving closer to the midpoint of the 2-4% target, adding that expectations remain well anchored.

The central bank cut its risk-adjusted inflation forecast for this year to 3.1% from 3.8% previously. It also lowered its risk-adjusted estimate for 2025 to 3.1% from 3.7% previously.

Meanwhile, it lowered its average baseline inflation forecast for 2024 and 2025 to 3.3% and 3.1% respectively, from 3.5% and 3.3% previously.

“Nevertheless, higher food prices other than rice, transport costs and electricity tariffs continue to pose upside risks to inflation,” Mr Remolona said. “Meanwhile, the outlook for domestic output growth remains in line with medium-term trends, against the backdrop of favorable labor market conditions and strong net exports.”

He said the Monetary Board is “on track” to cut rates at its next meeting on August 15. This will likely put it ahead of the US Federal Reserve, which previously indicated it could start easing in December.

“Last time I said we are still aggressive, but less so. We’re actually in the same position now. A little more forgiving than before,” Mr Remolona said.

The BSP could cut rates by 25 basis points (bps) in the third quarter and another 25 basis points in the fourth quarter, he added.

The Monetary Board review on August 15 is the only meeting in the third quarter. Meanwhile, the last two reviews for the year will take place in the fourth quarter and are scheduled for October 17 and December 19.

TOO early to cut?
Analysts noted the milder signals from the BSP compared to the previous meetings.

“Significantly, this time the lecture did not include any language about how policy should be ‘sufficiently tight’, but instead said that an improvement in the inflation outlook going forward would provide some room for policy to become ‘less restrictive’ ‘ to be. ‘” Miguel Chanco, chief emerging Asia economist at Pantheon, said in an email note.

HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay said in a note that the BSP’s tone “may be slightly more forgiving, and does not rule out the possibility of staying ahead of the Fed.”

“We even think the BSP was even more confident than last time, reFnoting that monetary policy in the Philippines may become more independent of the Fed, even if only partially,” he added.

However, Mr Dacanay said August may be too early to loosen the policy reins.

“We don’t think inflation will be soft enough by the August meeting, with the rice rate cut taking time to work its way into lowering prices,” Mr Dacanay said.

ANZ Research said in a report that it may be too early to cut ratesFInflation is still hovering around the upper end of the 2-4% target as “upside risks to food prices persist.”

ANZ expects the central bank to start cutting rates in early 2025, “if inflation moves consistently towards the middle of the official target range in the first quarter of 2024.”

Meanwhile, Mr Chanco still expects the BSP to cut by 25 basis points in August, in line with the BSP’s outlook.

“Our core view remains that the Governing Council will begin a gradual policy normalization in August with a 25 basis point rate cut, followed by similar cuts at the October and December meetings,” he added.

PESO INTERVENTION
Meanwhile, Mr. Remolona said the central bank intervenes in the peso “occasionally.”

“We have been keeping an eye on the peso. We don’t want the price to drop too much in value. We intervene occasionally. I think we took action today (Thursday). We don’t want the price to drop too much in value,” said Mr Remolona.

The peso closed at P58.75 per dollar on Thursday, up 11 centavos from P58.86 on Wednesday. Wednesday’s close was the weakest close in more than 20 months.

However, Mr Remolona said the peso’s effect on inflation is “not very large”.

“We think that the pass-through, which is what we call the effect of the depreciation on inflation, is estimated at 0.36% per 1% depreciation (of the) peso. Since the beginning of the year, the peso has depreciated by 5.7%. So 5.7% versus 0.36%, which amounts to a total inflation of about 0.2%.”

Mr Remolona said the central bank actively intervenes when it “observes stress in the market”.

“But mainly we are coming in to slow the peso’s tendency to depreciate sharply. We don’t come every day,” he added.

The Development Budget Coordination Committee on Thursday increased its exchange rate assumptions to a range of P56-P58 this year, a higher range than the previously used range of P55-P57.