MANILA -Now that the Bangko Sentral ng Pilipinas (BSP) has hit the pause button on its current and relatively aggressive monetary policy tightening cycle, which officials insist were done based on data and not on external factors, BSP Governor Felipe Medalla now says their next step would depend on what the Americans will do.
The reason for this is the BSP’s acknowledgement of market expectations about how much the gap should be between Philippine and US interest rates.
Also, Medalla said this as financial market expectations diverge on how long the pause will last, or whether this would be followed by a rate cut or a resumption of hikes.
The Monetary Board on Thursday decided to keep the BSP policy rate at 6.25 percent, mainly citing the slowdown of actual inflation readouts as well as lower expectations of inflation in the months ahead.
Over the past 12 months, the BSP policy rate was raised by a total of 4.25 percentage points from a historic low of 2 percent.
HSBC noted that the pause was in line with market expectations — 17 of 24 economists surveyed by Bloomberg — but was short of its forecast of “one last 25-basis-point hike before the BSP pauses its tightening cycle.”
“Furthermore, the pause seems to be a hawkish one,” they said.
Although Medalla said the BSP would ‘unlikely cut or raise rates’ in the next two to three meetings, the BSP stands ready to tighten monetary policy further if threats to inflation emerge.
Goldman Sachs and DBS Group were more precise with the belief that the pause would prevail over the rest of this year.
Goldman Sachs expects the BSP to start cutting the policy rate in the first of half 2024, in tune with its forecast that the United States Federal Reserve will loosen its monetary policy at that period.
Rizal Commercial Banking Corp., through chief economist Michael Ricafort, sees a BSP policy rate cut as early as August if inflation eased further and if the US Fed starts to cut rates by then.
Ricafort said this might happen amid signals about maintaining the interest rate differential between the Philippines and the US at 100 basis points or one percentage point to help stabilize the peso-dollar exchange rate and overall inflation.
Currently, the difference between the BSP and US Fed policy rates ranges from one to 1.25 percentage points.
Pantheon Macroeconomics expects the US Fed to start cutting its policy rate in September. This gives “the BSP the green light to follow suit in the fourth quarter.”
Medalla said in an interview with BloombergTV the BSP would raise its rate again if the US Fed does.
Meanwhile, “the pressure to cut is not high” because gross domestic product growth and demand for goods and services are expected to remain robust.
“If you believe the market, then they (US Fed) will do this before the end of the year but they (market analysts) are underestimating the determination of the Fed to bring down inflation,” Medalla said. “I think that this will happen maybe later, maybe next year. I don’t see a rate cut in the near term.”
In another interview with CNBC, Medalla said the BSP would be “too reckless” if the central bank ignored the sentiment of the market that the interest rate differential should be between within one and 1.25 percentage points.
“If inflation were purely a domestic issue, the pause will probably be no longer than two or three meetings,” he said.
“We have to be very vigilant that a small differential could cause a significant weakening of the Philippine currency, which could become a new anchor of inflationary expectations,” he added. “When that happens, there is a possibility of a stronger than expected reaction of wages and so on. So, it’s prudent to pause and it doesn’t make sense to raise.”