BSP will probably keep the policy tight

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

The BANGKO SENTRAL ng Pilipinas (BSP) is still likely to keep its policy frameworks tight even if inFIn May, the situation remained within target for the sixth month in a row.

“The BSP is likely to keep its monetary policy restrictive in the coming years Ffirst half of the year as inFRisks are believed to remain in the near term,” Emilio S. Neri, Jr., chief economist of the Bank of the Philippine Islands (BPI), said in a statement.

Policy easing can only be considered onceFThe lation stabilizes within 2-4% tarcome the third or fourth quarter, he added.

“We continue to raise the possibility of a postponement of the rate cut given that the Philippine economy maintains a healthy growth rate,” said Citi Philippines economist Nalin Chutchotitham.

The central bank could cut interest rates as early as August, BSP Governor Eli M. Remolona Jr. said earlier.

At its May meeting, the Monetary Board kept the benchmark interest rate steady at a 17-year high of 6.5%. The next policy review is on June 27.

The central bank raised borrowing costs by 450 basis points (bps) from May 2022 to October 2023 to curb inflation.

“Looking ahead, although we think the upside momentum could continue over the next two months given the unfavorable fundamentals e.gFDue to the weaker peso and ongoing food supply issues, we are still on track to reach sub-4% as early as August,” said Mr Neri.

This is in line with the BSP’s expectation thatFlation could exceed the target range of 2-4% amid base e through JulyFfects.

Headline inflation accelerated from 3.8% in April to 3.9% in May, the fastest print in six months or since 4.1% in November. May was also the sixth month in a row in which inflation settled within the target range of 2-4%.

“Some upside risks to inflation remain, due to possible adjustments in excise duties and minimum wages. We therefore still expect that the BSP will only start cutting the policy rate in August, once this has been receivedFThe peak has peaked around July,” Ms Chutchotham said.

The peso’s recent weakness could also slow the BSP’s easing cycle, Ms. Chutchotitham said.

“Additionally, in the event of high currency volatility, we think the BSP could also opt for delayed rate cuts to support the peso, especially if the Fed starts cutting later than July,” she said.

Mr Neri said the timing and size of the BSP’s interest rate cuts depend on the Fed. “As in localF“If conditions are right, the BSP will likely respond immediately with rate cuts once the Fed begins its easing cycle,” he said.

Nearly two-thirds of economists now predict the Fed will cut rates in September, according to the Reuters poll from May 31 to June 5.FReuters reported the recent bearish supply news.

“If the BSP lowers its policy rate before the Federal Reserve, a lowered rate will be diFThis increases the risk of a currency depreciation, which could offset the recent slowdown in food prices,” Mr Neri said.

Mr Neri said the peso could appreciate in the second half of the year, when the Fed is expected to start easing.

“While a Fed cut could lead to peso appreciation, the gains are likely to be smaller compared to other emerging market currencies given substantial current account deflation.Ficit of the country,” he added.

Mr. Remolona previously said the BSP does not need to “wait” for the Fed to cut spending before starting its own easing.

Meanwhile, Citi expects the BSP to cut rates by 25 bp in August, October and December, followed by 25 bp rate cuts in February, May and August 2025.

“Our forecasts are based on the assumption that the BSP would adjust the policy stance to ensure it does not become too tight to support economic momentum,” Ms Chutchotitham said.

However, Mr Neri said he expects the central bank to cut rates by 50 basis points this year.

“We now expect a rate cut of around 50 basis points this year, assuming the Federal Open Market Committee (FOMC) eases rates sometime in the second half,” he added.

Meanwhile, Nomura Global Markets Research said it expects the BSP will not start cutting rates until October, when inflation is “more anchored within the 2-4% target.”

“Importantly, given the improving inflation outlook, we still think the BSP is unlikely to start easing before the Fed (our US team expects a Ffirst cut in September) to avoid further exacerbating recent currency pressures among BSPs Fa flexible, market-determined FX regime, which we believe BSP is clearly still committed to.”

Nomura expects a total of 50 basis points of interest rate cuts this year and a further 100 basis points next year, bringing the policy rate to 5%.