Bangko Sentral ng Pilipinas. (File photo / Philippine Daily Inquirer)
The slower growth of the country’s gross domestic product (GDP) in the first quarter of 2023 firmed the forecast among many analysts that monetary authorities will bring the current series of interest rate hikes to a pause this week, albeit with a hawkish leaning, and perhaps even a cut later this year.
Over the past 12 months, the Monetary Board raised the Bangko Sentral ng Pilipinas’ (BSP) policy rate in all of their eight meetings plus an off-cycle increase in July 2022 by a total of 4.25 percentage points to 6.25 percent.
Chua Han Teng, who is with the Singapore-based DBS Group, noted that the BSP was primed for a “hawkish pause,” after having embarked on the most aggressive hiking cycle in the region.
Considering that, BSP “is likely to judge that its policy rate is tight enough to tackle inflation and be comforted that elevated inflation is finally cooling and not just due to the high base comparison a year ago,” Chua said.
He said the policy meeting set for May 18 would likely revolve around being flexible on future decisions based on incoming data, given that headline inflation remains above the BSP’s 2 to 4 percent target range.
“Should the BSP shift, it would be in line with hawkish pauses by some regional central banks,” Chua said.
He added that Philippine headline inflation has hit the zero month-on-month rate for two straight months as of April and, similarly, core inflation has also trended down.
Back to target
Nicholas Mapa at ING Bank said that while market analysts were split on whether BSP would keep its policy rate unchanged, recent comments from BSP Governor Felipe Medalla suggest an end to hikes now that inflation has shown clear signs of heading back to target.
“We expect BSP to pause on the downtrend and signal an eventual rate cut by the end of the third quarter should inflation trends persist,” Mapa said.
Euben Paracuelles at Nomura Group expects no movement until the end of this year.
Temporary stop
“Weaker [first-quarter] GDP growth supports further our forecast that the central bank will leave its policy rate unchanged at 6.25 percent [this] week and throughout the rest of 2023,” Paracuelles said.
Also citing the latest GDP readout, Robert Dan Roces at Security Bank Corp. said the BSP was likely to consider a temporary stop of hikes, taking care against unnecessarily slowing growth with a further rate increase this month.
“A pause and not a hold— meaning it might not declare the end of the tightening cycle just yet—as it (BSP) considers more data given emergent risks to inflation,” Roces said, referring to risks from the coming El Niño climate phenomenon.
Also looking at a rate hike pause are GlobalSource Partners, Goldman Sachs, and Pantheon Macroeconomics.
Miguel Chanco at Pantheon Macroeconomics said that with three straight months of slower inflation, the “door [was] now wide open” for a BSP pause this month.
Emilio Neri Jr. at Bank of the Philippine Islands likewise sees a pause, but not as convinced as the others.
“We are not counting out another hike in the upcoming meeting since core inflation remains elevated (at 7.9 percent),” Neri said. “Second-round effects have persisted and this may require additional tightening.”
On the other hand, Fitch Solutions subsidiary BMI has penciled in an additional increase of 0.25 percent to bring the policy rate to 6.5 percent, which will be prompted by concerns over price stability.
“Subsequently, we think that interest rates will be kept at a multi-year high of 6.5 percent throughout 2023, with rate cuts only possibly materializing in 2024,” BMI said. INQ