Analysts: Key rates to stay unchanged
BY NIÑA MYKA PAULINE ARCEO
The Manila Times
THE Bangko Sentral ng Pilipinas (BSP) will likely keep key interest rates unchanged this THURSDAY AS DOMESTIC INflATION EXPECTATIONS remain well-anchored, analysts said. They told that despite last month’s inflation uptick, a fourth successive pause should be expected, especially with the US Federal Reserve also seen holding rates steady. Monetary authorities worldwide were forced to tighten last year as inflation surged in the wake of Russia’s invasion of Ukraine. The BSP’s policy rate currently stands at a 16-year high of 6.25 percent following 425 basis points (bps) of rate hikes. A pause was ordered in May this year after domestic inflation started falling from January’s 14-year high of 8.7 percent. Two more pauses, in June and August, were prompted by a continued easing in consumer price growth. Renewed price pressures, however, saw inflation pick up to 5.3 last month — higher than a consensus forecast of 4.9 percent — from 4.7 percent in July. Core inflation, which strips out volatile food and energy items slowed to 6.1 percent from 6.7 percent. Year-to-date, inflation rose to 6.6 percent while core inflation averaged 7.4 percent, still well over the central bank’s target range of 2.0 to 4.0 percent. Capital Economics chief economist Shivaan Tandon said that despite the recent increase in headline inflation, the BSP was likely to have found comfort in core inflation. “There are also signs the central bank is becoming concerned about the worsening economic outlook … as the BSP’s aggressive tightening cycle of the past 18 months and subdued global demand weigh on prospects,” Tandon added. China Banking Corp. chief economist Domini Velasquez said domestic inflation projections remained secure, giving monetary authorities sufficient assurance to keep pausing. “We estimate that inflation could still be on track to reach the BSP’s 2-4 percent target range by the fourth quarter if domestic supply pressures are addressed in a timely manner,” she added. “Despite this, we also expect the BSP to maintain its hawkish stance given persisting upside risks to the inflation outlook, particularly the continued increase in global oil prices.” Velasquez said the general consensus was that the US Fed would pause when it meets on September 19 to 20 and might be nearing the conclusion of its tightening cycle. “If realized, this would maintain the current 75 bps interest rate gap and alleviate downward pressure on the peso.” Philippine National Bank economist Alvin Joseph Arogo said key interest rates were likely to stay unchanged for the rest of the year given the subdued economic outlook and the possibility that monthly inflation could return to target before year-end. “If the currency continues to substantially weaken, however, then the central bank may need to temporarily sacrifice supporting expansion until the peso stabilizes,” Arogo said. “As such, a final 25 bps hike this year still has a fair chance of happening, whereas a rate cut is very unlikely.” HSBC Global Research economist Aris Dacanay said that economic growth concerns were likely to be “front and center” during the Monetary Board meeting. “We think the BSP will first monitor what the final policy will be before considering a continuation of its tightening cycle,” Dacanay said. “Nonetheless, there is a risk that the BSP preempts any second-round effects by hiking policy rates in anticipation of the price pressures ahead,” he added. Dacanay said the BSP would only start cutting rates after the Fed does so. Oxford Economics economist Makoto Tsuchiya, meanwhile, said inflation was still too high for a pivot to easing. The weakening growth picture also means that a hike is undesirable, he added. “We expect inflation to settle within the 2.0-4.0 percent target by the end of the year and average 5.8 percent for the whole year, which will allow BSP to start cutting rates in the first quarter of 2024,” Tsuchiya said. For his part, Security Bank Corp. Senior Assistant Vice President and chief economist Robert Dan Roces said “the recent uptick in the August inflation alone is unlikely to prompt the BSP to resume tightening, recognizing the supply-side nature of the uptick and the fact that there would only be so much that monetary policy can do in such a situation…”. “Looking ahead, inflation should still moderate in the coming month, but the BSP is unlikely to start easing policy until the middle of 2024, after the US Federal Reserve does so,” he added. Similarly, ING Manila Bank senior economist Nicholas Antonio Mapa said the BSP would exercise caution given the economy’s decelerating growth and take into consideration outside factors such as oil prices and the Federal Reserve’s policy position. “We actually think inflation will kick back up due largely to the flare-up in rice and imported energy costs,” he added. “We see inflation only returning to target in the first quarter of 2024 with inflation averaging 5.9 percent with December inflation at 4.1 percent,” he added. Rizal Commercial Banking Corp. chief economist Michael Ricafort also said that with a Fed pause as indicated by US central bank chief Jerome Powell and widely anticipated by the financial markets, the BSP was likely to maintain interest rates. Mitzie Irene Conchada, associate professor at the School of Economics of De La Salle University, said the BSP would opt to give the economy some space to breathe. Moreover, Pantheon Macroeconomics economist Miguel Chanco said a key factor was that August inflation was consistent with the range predicted by the BSP. “Its (the BSP’s) official response to the result was fairly nuanced, reiterating their board’s expectation that inflation will continue to trend towards its target range by the end of this year,” he said. Bank of the Philippine Islands senior economist Emilio Neri said a fourth pause would be the BSP’s response to supplydriven inflation and a significant second-quarter economic slowdown. A rate increase remains possible with the Fed still likely to resume hiking interest rates, he added. Emmanuel Lopez of the Colegio De San Juan de Letran Graduate School held the view that a 25-bps rate hike could not be ruled out. “This is aggravated by the continuing increase in the price of basic petroleum products for the 7th straight week which has already totaled to 14 pesos . ... Not to mention the impending surge in demand brought about by the forthcoming holiday spending,” Lopez said. “The increase in prices has affected not only food products but across all commodities in the market,” he added.