Overview
The Philippine central bank is set to maintain its key interest rate at 6.50% for the second time, supported by easing inflation and a stronger currency. Inflation reached a 20-month low in November, nearing the Bangko Sentral ng Pilipinas’ (BSP) 2%-4% target. Additionally, the peso posted its best monthly performance in a year following a 25 basis-point hike at the end of October. While these factors reduce the pressure for another rate increase, the BSP remains cautious about potential future inflationary risks.
Monetary Policy and Rate Expectations
Assessing the risk of inflationary pressures resurfacing, the BSP states the need for a “sufficiently tight” monetary policy until evidence of a sustained downtrend emerges. Consequently, rate cuts are not anticipated until the third quarter of 2024. Among the 24 economists surveyed, all but one expect the central bank to maintain its overnight borrowing rate at 6.50% throughout December 14.
Analysts’ Perspectives
Jin Tik Ngai, EM Asia economist at J.P., suggests that unless there are significant inflationary or external financial condition surprises, the tightening cycle is likely complete. Ngai noted, “We expect growth to soften next year on the back of slower global growth and private investment. However, the BSP… is more sensitive to headline inflation instead of growth so unless a global recession or significant deflationary headwinds kick in, the central bank’s rate cuts will likely be measured.”
Rate Forecast
Median forecasts indicate that interest rates will remain unchanged until the end of Q2 2024, followed by 50 basis points of cuts in each of the remaining two quarters, mirroring the approach of the U.S. Federal Reserve. However, experts’ expectations for the third quarter of next year vary, with approximately half of respondents forecasting rates at 6.00%, four at 6.50%, and three each at 6.25% and 5.75%.
Gradual Easing Cycle and Future Outlook
While risks to inflation continue to lean towards the upside, Aris Dacanay, ASEAN economist at HSBC, suggests that it may be too early to consider rate cuts. The economy needs time to absorb the BSP’s tight monetary stance before any easing measures take effect. Dacanay adds, “That being said, we expect the BSP to gradually begin its easing cycle after the Fed initiates its first rate cut in Q3 2024.”
Currency Performance
The Philippine peso has demonstrated a modest 0.1% gain against the U.S. dollar year-to-date, while many other Asian currencies remain in negative territory.