People enter a shopping mall in Mandaluyong City, Oct. 1, 2023. — PHILIPPINE STAR/MIGUEL DE GUZMAN

By Keisha B. Ta-asan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) left its key rate unchanged at 6.5% for a second straight meeting on Thursday but signaled a “tighter-for-longer” policy until inflation expectations have become more firmly anchored.   

At its last policy meeting for the year, the Monetary Board maintained its target reverse repurchase rate at a 16-year high of 6.5%, as expected by 15 economists in a BusinessWorld poll last week.

Interest rates on the overnight deposit and lending facilities were also left unchanged at 6% and 7%, respectively.

“The Monetary Board continues to see the need to keep monetary policy settings sufficiently tight to allow inflation expectations to settle more firmly within the target range,” BSP Governor Eli M. Remolona, Jr. said in a statement.   

This is the second straight meeting that the BSP stood pat since its 25-basis-point (bp) off-cycle hike on Oct. 26.   

The central bank raised borrowing costs by a total of 450 bps from May 2022 to October this year.

According to Mr. Remolona, the balance of risks to the inflation outlook remains significantly on the upside.

“Key upside risks are associated with potential pressures emanating from higher transport charges, increased electricity rates, and higher oil prices,” he said.   

The BSP lowered its risk-adjusted inflation forecast for 2023 to 6% (from 6.1% in November) and 4.2% (from 4.4%) for 2024. It kept its inflation forecast at 3.4% for 2025. 

Meanwhile, the BSP maintained its average inflation baseline forecasts at 6% for 2023, 3.7% for 2024, and 3.2% for 2025.   

“Part of the reason for (the adjustment) is some of the risk that we were previously reckoning in the last meeting has been included in the baseline such as the strong El Niño. So, some of the potential upside risks have been made part of the baseline already,” BSP Department of Economic Research Director Dennis D. Lapid said.   

BSP Senior Assistant Governor Iluminada T. Sicat said they anticipate a strong El Niño episode in the first quarter next year, before moderating in the second quarter. The BSP estimates that the El Niño weather event could impact inflation by 0.02 percentage point in 2024.   

Ms. Sicat said inflation may return to the 2-4% target range by the first quarter of next year, but it will quicken to above the target in the second quarter. 

“Inflation is likely to settle (within 2-4%) in the first quarter in 2024 mainly due to the negative base effects but could temporarily accelerate above the target from April to July due to the impact of El Niño weather conditions, the lag impact of wage adjustments in 2023, as well as the positive base effects,” she said.   

“Subsequently, inflation is projected to return to target in the third quarter of 2024 and settle nearer in the midpoint of the target in the fourth quarter of 2024 owing to the decline in the world oil prices,” she added.   

Headline inflation slowed to 4.1% in November from 4.9% in October. November marked the 20th straight month that inflation breached the central bank’s 2-4% target range. In the January-to-November period, inflation averaged 6.2%.   

Mr. Lapid also said the BSP incorporated the looming water rate hike in Metro Manila in their forecasts, but noted it only has a “minor effect.”

The Metropolitan Waterworks and Sewerage System approved an increase of P6.41 per cubic meter for Manila Water Co., and a hike of P7.87 per cubic meter for Maynilad Water Services, Inc. The higher rates will take effect on Jan. 1, 2024.   

Mr. Remolona also said strong demand is expected in the fourth quarter due to sustained consumer spending and improved labor market conditions.   

“The BSP will also continue to monitor how firms and households are responding to tighter monetary policy conditions alongside evolving domestic and external economic conditions,” he said.

Mr. Remolona also said the BSP’s latest survey of private economists shows that inflation expectations have been anchored, as mean forecasts for 2024 and 2025 are within the 2-4% target range.   

In its survey of 25 external analysts between Dec. 5 and Dec. 10, the BSP said there were lower mean inflation forecasts for 2023 (at 6% in December from 6.1% in November) and for 2024 (at 3.9% from 4%).   

However, the mean inflation forecast for 2025 stood at 3.5%, a tad higher than the 3.4% previously.

“The Monetary Board also noted that previous adjustments have continued to work their way through the economy, as can be seen from the declining path for core inflation,” Mr. Remolona said.   

Core inflation, which discounts volatile prices of food and fuel, eased to 4.7% in November from 5.3% in October. In the 11 months to November, core inflation averaged 6.8%. 

“In the coming quarters, the National Government’s non-monetary interventions will remain crucial to sustain the disinflation process. Going forward, the BSP remains ready to adjust monetary policy settings as necessary, in line with its mandate to ensure price stability,” Mr. Remolona added.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said even if the Monetary Board continues to pause, tight monetary policy will continue to weigh on economic growth. 

“Our base case still is that the Board will start easing monetary policy in the first quarter of next year, with 2024 likely to see a total of 100 bps worth of rate cuts, at least, to take pressure off of a slowing economy,” he said. 

Mr. Chanco said the Philippine economy may grow by 4.8% in 2024, slower than a likely 5.4% expansion this year, mainly due to slower private consumption.

He also noted the US Federal Reserve has signaled that a shift to a neutral stance.

“Our house view is that the Fed will slash rates by 150 bps in 2024, giving central banks across the region more than enough room to start normalizing,” he added.

As widely expected, the US Federal Reserve kept rates unchanged at 5.25-5.5% during the Dec. 12-13 meeting. The Fed has raised policy rates by 525 bps from March 2022 to July 2023.

Meanwhile, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the BSP is unlikely to cut anytime soon.

“The central bank will likely extend its pause until inflation is well-within target and until inflation expectations are anchored,” he said.

“We expect the BSP to be on hold well into 2024, with potential rate cuts only likely to be considered towards the end of next year,” he added.