Analysts: BSP may cut rate starting May

By Keisha B. Ta-asan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) is widely expected to gradually cut key rates this year starting as early as May, with prices likely to be under control, analysts said on Monday.

Monetary authorities are becoming less hawkish based on their policy statement last week, Pantheon Chief Emerging Asia Economist Miguel Chanco said in a note.

“Talk of a need to keep monetary policy settings sufficiently tight is completely gone, with members committing merely to keep them unchanged in the near term amid the improvement in inflation conditions,” he said.

The BSP is trying to strike a delicate balancing act to support the economy while ensuring that any interest rate decisions do not fan inflation or put pressure on the peso and lead to capital outflows.

The BSP kept its benchmark interest rate — as expected — at a near 17-year high for a third straight meeting on Thursday, as policy makers remained watchful despite easing consumer prices. Policy makers want to make sure inflation will continue to cool before cutting the key rate.

Mr. Chanco said a potential pivot this year is on the table, a suggestion the central bank did not entertain late last year.

“We reckon it can afford to be more ambitious than this at its next few meetings,” he said. “We have an average inflation forecast of 2.8% for 2024 and maintain that the BSP will lower rates by a total of 100 bps this year, with the first cut likely to come in May.”

The Monetary Board would likely cut rates by 50 or 75 basis points (bps) this year, but future policy moves would depend on the US Federal Reserve, Nicholas Antonio T. Mapa, a senior economist at ING Bank N.V. Manila, told a news briefing.

“It’s difficult to see BSP moving ahead of the Fed,” he said. “If we see aggressive rate cuts by the Fed, then maybe the BSP can follow. They’ll just have to stay data dependent. It’s always hard to make a call but the timing is definitely after the Fed.”

The BSP has been the most aggressive central bank in the region, hiking policy rates by 450 bps from May 2022 to October 2023 to tame inflation.

The US Federal Reserve had said inflation should cool first before policy makers consider cutting borrowing costs. The Fed raised its policy rate by 525 bps to 5.25-5.5% from March 2022 to July 2023.

Robert Carnell, chief economist and head of research for Asia-Pacific at ING Bank, said the Fed could ease policy rates by 150 bps this year, starting May.

Cutting rates by 150 bps this year is aggressive, he said, adding that the US economy must show a marked economic slowdown or downturn after a period of rapid growth.

ROOM FOR RATE HIKE

“That really comes when the wheels start to drop off the economy and for that, you need to start seeing an unemployment rate beginning to move higher, the payroll numbers looking much softer, the retail sales figures would be awful,” he said.

“The US still got a macroeconomy that’s extremely robust,” Mr. Carnell said. “My guess is that we find that the landing is softer and that we need to push back the easing.”

Mr. Mapa noted that if the US Fed starts cutting interest rates by May, the BSP could follow suit by June if local inflation is still within the 2-4% target.

Inflation eased to the lowest in three years to 2.8% in January from 3.9% in December and 8.7% a year ago. It was the second straight month that inflation was within the BSP’s 2-4% target.

Last week, the BSP lowered its risk-adjusted inflation forecast for this year to 3.9% from 4.2% but raised its outlook for 2025 to 3.5% from 3.4%.

It also cut its baseline inflation forecast for this year to 3.6% from 3.7% but kept its projection for 2025 at 3.2%.

Moody’s Analytics said the BSP’s recent policy move was in line with expectations. “We expect rates to hold steady until cuts start from mid-2024,” it said in a separate report.

Mr. Carnell does not rule out the possibility of the Fed increasing rates further this year if US inflation unexpectedly picks up in the second half.

“Let’s suppose that the Fed has been very cautious and hasn’t eased already by that stage,” he said. “Could I perhaps imagine that maybe one last 25-bp hike is something that they need to deliver to properly pull inflation back down? It’s a difficult thought experiment to run but it’s not an impossible one.”

The BSP may also not be done with its hiking cycle if the Fed does deliver one more rate hike.

“If the Fed does hike rates, then there would be room for additional rate hikes,” Mr. Mapa said. “[But BSP] doesn’t have to respond right away. They have to gauge if there’s pressure in the spot market.”

The BSP will hold its next policy review on April 4.