MANILA -The monetary policy tightening cycle of the Bangko Sentral ng Pilipinas (BSP) “has ended” and the benchmark rate is expected to be kept on hold for the remainder of the year before reductions happen in 2024, according to global research and data firm BMI.
For this forecast, the Fitch group subsidiary cites inflation in the Philippines falling faster than they originally anticipated—and also given that economic activity was starting to soften and the United States Federal Reserve is nearing the end of its own tightening cycle.
“In addition to lower inflation, we note that the end of the Fed’s hiking cycle later this year will also relieve pressure on the Philippines external sector, which will reduce the need for the BSP to lean towards fresh hikes to defend its currency,” BMI said.
Stable peso
The Fitch unit noted that after a sharp depreciation in 2022, the Philippine peso has shown general stability—“pretty much flat”—so far in 2023.
BMI also said that growth of the gross domestic product will slow sharply from 7.6 percent in 2022 to 5.9 percent in 2023 due to lackluster global demand and the lagged impact of the BSP monetary policy tightening.
“Given the softening economic outlook, the BSP will try to avoid over-tightening given that it has already hiked by a cumulative 425 basis points so far this cycle, which is a much more aggressive pace than most other Asian peers,” BMI added.
Speaking at an economic forum hosted by The Manila Times on Tuesday, outgoing BSP Governor Felipe Medalla said the regulator could now shift focus on other priorities after having done well on keeping prices of goods and services stable by taming inflation, although price pressures are still upward.
Medalla said current circumstances had allowed the BSP to prioritize its mandate of price stability because the banks that it supervises were strong.
Price stability
“We were able to raise interest rates as much as we had to because we were confident that the banks will remain stable and the borrowers will remain safe even with relatively high interest rates,” the BSP chief said.
“The BSP was able to focus on price stability since its key policy rate decisions have not been constrained—unlike in the United States—by fears of financial stability implications of higher (policy) rates,” he added.
Last week, he said that with the BSP having done enough in addressing inflation to see the growth rate of prices on a downtrend, the central bank’s focus under a new Governor would be on the further development of the Philippine capital market as well as of a better and more efficient payments system.
Since registering at 8.7 percent in January, headline inflation has been receding every month to settle at 6.1 percent in May.
At the forum on Tuesday, Medalla said the BSP will continue to work toward an enabling regulatory landscape for the Philippine banking system, which remained sound, stable and supportive of economic growth.
“The BSP will continue to harness technology to make the payment system more digital and inclusive,” he added. INQ
Rates to hold at 6.25% until year-end; possible cuts seen in 2024