BSP seen keeping 6.5% policy rate at Feb. 15 meet

MANILA, Philippines  —The Bangko Sentral ng Pilipinas (BSP) will likely keep its policy rate unchanged at its first meeting for this year next week despite inflation staying within the target for the second straight month in January, analysts said.

The BSP’s benchmark rate—which banks typically use as a guide when charging interest rates on loans—is currently at 6.5 percent, the highest in 16 years. By keeping borrowing costs high, the central bank wants to bring demand for key consumer items in line with limited supply to prevent a fast rise in prices.

In a commentary, Aris Dacanay, economist at HSBC Research, said risks to inflation “are still tilted to the upside” as he also cautioned against cutting rates ahead of the US Federal Reserve.

“For one, we still expect headline CPI (Consumer Price Index) to accelerate in the coming months when unfavorable base effects kick in,” Dacanay said.

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

“Second, we don’t think the BSP can cut ahead of the Fed … Cutting ahead of the Fed may result in a volatile [peso], which, in turn, could lead to FX-induced inflation,” he added.

The Monetary Board, the BSP’s policy-making body, will meet on Feb. 15.

Inflation, as measured by the CPI, softened to an annualized rate of 2.8 percent in the first month of 2024, from 3.9 percent in December.

Within target

The latest reading, the lowest since October 2020, matched the lower-end of the BSP’s forecast range for the month. It was also the second consecutive month that inflation eased to within the BSP’s 2 to 4 percent target after hovering above that range for 20 months.

While there were less upward price pressures last month, especially among key food items, the PSA said a “substantial” part of the milder inflation in January was due to a high “base effect.”

READ: Inflation softened in Jan to over three-year low of 2.8%

With threats to its inflation target still very much present, the BSP said it “deems it necessary to keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes evident.” Governor Eli Remolona Jr. said a rate cut was “possible” this year.

Robert Dan Roces, chief economist at Security Bank, also believed that “underlying concerns” about persistent price pressures and outpacing the Fed would hold back the BSP from easing this early.

“However, as inflation eases by the middle of 2024, the BSP is expected to shift gears and gradually ease monetary policy once the Fed does so as well,” Roces said.