Key rates likely to stay unchanged – analysts

KEY interest rates will stay on hold this Thursday given a lack of urgency to adjust policy, analysts polled by The Manila Times said.

Economic growth, while below target last year, remains strong even as inflation has yet to stabilize, they noted.

Gross domestic product (GDP) expanded by 5.6 percent in 2023, missing the government's 6.0- to 7.0-percent goal but still one of the fastest in the region.

Inflation, meanwhile, has stayed within the 2.0- to 4.0-percent target for the last two months — it fell to 2.8 percent in January — but could again spike due to the impact of El Niño on food prices.

This upside risk has prompted the Bangko Sentral ng Pilipinas (BSP) to remain hawkish and a rate hike, if needed, is expected not to harm the economy given its relative strength.

The central bank's benchmark rate currently stands at 6.5 percent, the highest since 2007, following 450 basis points (bps) of rate hikes beginning May 2022 as inflation started surging.

Pantheon Macroeconomics economist Miguel Chanco said the BSP's policymaking Monetary Board would pause for a third straight meeting on February 15 and again on April 4 before finally easing.

“We still expect the board to start normalizing policy soon, simply because policy will continue to tighten in real, inflated-adjusted terms just by remaining on hold, with the first cut likely to be in May, from our vantage point,” Chanco said.

Oxford Economics economist Makoto Tsuchiya said he expected the BSP to “remain cautious before cutting rates by 25 bps in the second quarter, when it sees [that] inflation can be sustained within the 2-4 target band.”

“For the whole year, we think the bank will cut its rate by 125 bps in total, bringing the rate to 5.25 percent at year-end,” he added.

Mitzie Irene Conchada, associate professor at the School of Economics of De La Salle University, said the BSP would wait until inflation finally settles firmly within target.

She noted that rice prices, in particular, were continuing to rise and overall price growth could again require monetary intervention.

China Banking Corp. chief economist Domini Velasquez also said “there is still a chance for inflation to overshoot the 4.0-percent target with looming risks on the horizon.”

“Hence, [the] BSP will likely continue to maintain its hawkish stance despite within-target inflation in the last two months,” she added.

Velasquez said BSP rate cuts would also not come ahead of a US Federal Reserve easing, now widely expected not to start until May at the earliest.

ING Manila Bank senior economist Nicholas Antonio Mapa echoed this and added that the first BSP cut would be 25 bps.

“I think the BSP will be keen on reversing their emergency rate hike in October when they took rates to 6.5 percent,” he said.

“If the risk-adjusted inflation forecast moves even closer to the baseline inflation forecast … then we could see the BSP reducing borrowing costs to help bolster sagging private investment activity.”

HSBC Global Research economist Aris Dacanay also expects rate cuts to only follow after the Fed takes action.

“But with growth in the Philippines strong, the BSP has room to cut much later than the Fed in the scenario of upside risks to inflation materializing all at the same time,” he said.

“Here, rice CPI (consumer price index) will be key to monitor as we have yet to see global rice prices peak. But for now, all is well for the upcoming meeting …,” he added.

Union Bank of the Philippines chief economist Ruben Carlo Asuncion said any decision to cut interest rates would hinge on how core inflation — which excludes volatile food and energy prices — turns out in the months ahead.

Security Bank Corp. chief economist Robert Dan Roces, for his part, said that “despite Philippine inflation dipping below target and core inflation reaching its desired level, a rate cut by the central bank in February is unlikely.”

“Concerns about outpacing the Federal Reserve and increasing peso vulnerability to selling pressure, given its recent depreciation, may hold back the central bank,” he added.

Emmanuel Lopez of the Colegio de San Juan de Letran Graduate School also said that rates would stay on hold “considering that the agricultural sector has just started to be affected by the El Niño phenomenon.”

“However, if the current decrease in inflation rate is sustained, we can see a decrease in the policy rate towards the second quarter of 2024 by at least 25 basis points.”