By Luisa Maria Jacinta C. Jocson, Reporter
THE BANGKO ng Pilipinas (BSP) stood pat for a fifth straight meeting but signaled a “less hawkish” tone amid lower-than-expected inflation.
This as the central bank now sees the possibility of monetary easing as early as August.
The Monetary Board on Thursday left its target reverse repurchase rate unchanged at a 17-year high of 6.5%, as expected by 17 out of 19 analysts in a BusinessWorld poll last week.
Interest rates on the overnight deposit and lending facilities were left unchanged at 6% and 7%, respectively.
“We are actually somewhat less hawkish than before, which means we could ease (or) cut rates by the third or fourth quarter this year,” BSP Governor Eli M. Remolona, Jr. said at a press briefing.
Mr. Remolona said that they may reduce rates “possibly by August of this year.”
At an event late on Thursday, Mr. Remolona told reporters that the BSP could deliver a 25-basis-point (bp) rate cut at its Aug. 15 meeting.
He said there could be one or two rate cuts within the second semester. “It’s a range between 25 bps and 50 bps for the rest of the year,” he added.
Mr. Remolona noted the BSP might start easing ahead of the US Federal Reserve, which he expects to start cutting rates by September.
The BSP chief said he is not worried about the potential impact on the peso, noting that there would only be a “bit” of pressure on the currency if the BSP cuts before the Fed.
However, Mr. Remolona said that it still sees the need for “sufficiently tight monetary policy settings” until inflation can settle firmly within the 2-4% target band.
“A restrictive policy stance will also help keep inflation expectations anchored amid a possible buildup in upside risks to future inflation,” he added.
The BSP lowered its risk-adjusted inflation forecast for this year to 3.8% from 4% previously. However, it raised its risk-adjusted forecast for 2025 to 3.7% from 3.5% previously.
Meanwhile, the central bank also adjusted its average baseline inflation forecast to 3.5% from 3.8% previously. It also hiked its baseline forecast to 3.3% for 2025 from 3.2%.
Mr. Remolona noted that their less hawkish stance was due to the “better-than-expected” April inflation figure.
Headline inflation quickened for a third straight month to 3.8% in April from 3.7% in March. It also marked the fifth straight month that inflation fell within the 2-4% target range.
For the first four months of 2023, inflation averaged 3.4%.
However, the BSP chief warned that risks to the inflation outlook “continue to lean toward the upside.”
“Potential price pressures are linked mainly to higher transport charges, food prices, electricity rates, and global oil prices,” Mr. Remolona said.
BSP Deputy Governor Francisco G. Dakila, Jr. said the BSP still anticipates inflation could potentially overshoot the 2-4% target band from May until July amid positive base effects.
“But even if there were to be some breach of the inflation target band, the expectation is that this will be temporary and there will be a reversion to the target band,” Mr. Dakila added.
LESS HAWKISH
Meanwhile, Capital Economics Senior Asia Economist Gareth Leather noted the BSP’s less hawkish tone at Thursday’s meeting compared with its meeting in April.
“Not only did the central bank cut its inflation forecast for this year, but clearly hinted that rates would be cut in the third or fourth quarter. This supports our forecast that the easing cycle will begin in August,” he said in a note.
ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said that Mr. Remolona took on a “more dovish tilt” at Thursday’s meeting.
“Despite this recent shift in tone from the previously hawkish Remolona, we hold on to our previous expectation that the BSP can only cut policy rates ‘as soon as the Fed does,’” he said in an e-mail note.
Markets were initially anticipating the US Federal Reserve to cut rates as early as June, but this has been pushed back to the fourth quarter amid persistent inflation in the United States.
Mr. Leather said that Philippine inflation should continue to decelerate in the coming months.
“However, while inflation is likely to remain elevated over the next few months, it should fall in the second half of the year on the back of an increase in the supply of agricultural products, slower economic growth and more beneficial base effects,” he added.
Pantheon Chief Emerging Asia Economist Miguel Chanco said that inflation could possibly overshoot the target band in May.
“A minor breach of the upper bound remains likely this month, given the still-unfavorable food price base effects in play,” he said in a note.
“But the May print should be the peak, with a sustained period of disinflation set to take hold from June — with food-price base effects U-turning to sharply favorable — opening the door in August for the first of three 25-bp rate cuts we expect this year,” he added.
Mr. Leather also sees the BSP cutting rates by 25 bps in August, with further rate cuts late this year.
For his part, Mr. Mapa expects the first rate cut to be delivered in October.
