BSP unlikely to cut interest rates too soon this year, says think tank

MANILA, Philippines  —The Bangko Sentral ng Pilipinas (BSP) would likely keep its tight monetary policy “for longer” as the economy has yet to completely absorb previous interest rate hikes while upside price pressures remain, New York-based think tank GlobalSource Partners said.

“We believe that the BSP will maintain a higher interest rate for longer, precisely because first of all, it considers its previous monetary tightening is yet to fully take effect because of the long lags of monetary adjustment,” Diwa Guinigundo, country analyst at GlobalSource, said in a commentary dated Jan. 8.

“Secondly, upside risks to the baseline forecasts including global uncertainty remain dominant such that an early reset could trigger a price upsurge and upset inflation expectations,” said Guinigundo, a former BSP deputy governor who was responsible for monetary and macroeconomic policy research and international operations.

Rate cut bets

Asked whether a shift to dovish policy would be possible this 2024, Guinigundo said in a text message on Friday, “If this year, it should be toward the fourth quarter, as long as inflation forecasts indicate within-target levels.”

In the Philippines, it usually takes about 18 to 24 months for monetary policy to make a significant impact on price trends.

State statisticians last week reported that inflation had slowed down to 3.9 percent in December, from 4.1 percent in November. That was the first time in 20 months that prices increases were contained within the 2 to 4 percent target range of the inflation-targeting BSP. The December print was also the lowest reading in 22 months.

READ: PH December inflation eases to 3.9%

Already, other groups are betting on a rate cut by the BSP in the second half of 2024, when the US Federal Reserve (Fed) is also widely expected to start easing its own monetary policy. Some analysts said the BSP must move in lockstep with the Fed to avoid pressuring the peso.

But despite the milder increase in prices last month, the BSP itself had said it’s necessary to “keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes evident.” At its last meeting for 2023, the powerful Monetary Board kept the BSP’s overnight borrowing rate unchanged at 6.5 percent, the highest in 16 years.

‘Dissonant’ voices

BSP Governor Eli Remolona Jr. said the BSP had to tighten monetary policy despite inflation being driven mostly by supply shocks in order to tame inflation expectations.

“Supply shocks lead to a kind of inflation expectations that lead to second-round effects. So other things also go up. Wages go up, transportation fares go up and some of these things,” Remolona said. “And monetary policy has to do something about that. And that’s the reason we have to tighten, even in the face of supply shocks.”

Meanwhile, GlobalSource’s Guinigundo believes that the economy is strong enough to endure a high interest rate environment for a longer period, citing the recovery from a pandemic-induced meltdown and improving labor market conditions.

READ: Philippine rates to stay higher for longer to tame inflation, says BSP chief

“If there is any lingering reservation about keeping high interest rates for longer, real and fiscal policymakers in the Philippines should realize that the side effects of keeping interest rates higher for longer do not necessarily lead to bad results in both output and employment,” he said.

“Dissonant voices on the policy front could create black noise in the market and could undermine faith in public policy,” he added.