BSP takes cue from still-hawkish Fed

MANILA, Philippines  —The US Federal Reserve, whose actions heavily influence local monetary policy, would likely keep its key rate high for a much longer period than what the market expects amid a still robust American labor market, said an inter-agency body that includes the Bangko Sentral ng Pilipinas (BSP).

“Our view is that any expectation of an early rate cut is optimistic,” the Financial Stability Coordination Council (FSCC) said in its 2023 Financial Stability Report released Tuesday.

“It is more likely that the Fed will keep its policy rates elevated over a longer period than expected by the market,” the FSCC added.

Apart from the BSP, other members of the FSCC include the Department of Finance, Insurance Commission, Philippine Deposit Insurance Corp., and the Securities and Exchange Commission.

Easing inflation

Analysts are expecting the Fed to cut interest rates this year, although the exact timing is still the subject of market discussions. Similar to other central banks, the BSP is widely expected to move in lockstep with the Fed to avoid pressuring the peso and stoking inflation.

Apart from declining inflation, the FSCC said the Fed is likely looking for more signs from the US economy before making any easing moves, particularly the US jobs market, which remains robust despite the high-interest rate environment.

“On our part, we believe that the assurance being sought by the Fed requires that declining inflation be accompanied by a softening labor market,” the FSCC said.

“This is not yet the case, with employers adding a stronger-than-expected 216,000 non-farm payroll for the month of December,” it added.

After softening to 4.1 percent in November last year, inflation at home had since eased back to the 2 to 4 percent target range of the BSP, with the January reading at 2.8 percent, the lowest in over three years.

Rate cut possible in 2024

But with threats to its inflation target still very much present amid a prolonged El Niño dry spell, the BSP said it “deems it necessary to keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes evident.”

Nevertheless, Governor Eli Remolona Jr. said a rate cut is “possible” this year.

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.

The BSP will hold its first monetary policy meeting this year on Feb. 15.