Unexpected US inflation flare-up seen pushing back BSP rate cuts

MANILA,  Philippines  —A resurgent inflation in the United States may push back any easing moves by the Bangko Sentral ng Pilipinas (BSP) to the fourth quarter of 2024, as it is widely expected to stay in lockstep with the US Federal Reserve.

Assuming that the Fed would start cutting its benchmark rate in the third quarter, ANZ Research said in a commentary on Friday that the BSP may follow suit in the final quarter of the year.

“The BSP did not explicitly discuss the potential timing of a policy pivot. However, it stated that any increase in inflation risks or unfavorable global developments could push rate cuts to 2025,” ANZ economists Debalika Sarkar and Sanjay Mathur said.

“Therefore, we do not expect a rate cut to materialize before Q4 2024, assuming the US Fed’s easing cycle starts in Q3 2024. Our year-end 2024 policy rate forecast of 6 percent assumes a 50-basis point rate cut in the last quarter of 2024,” they added.

The latest US consumer price index was unexpectedly hotter at 3.1 percent in January, shaking expectations of early Fed rate cuts.

READ: Rents boost US consumer prices in Jan

No less than the interagency Financial Stability Coordination Council (FSCC), which counts the BSP among its members, said that “any expectation of an early rate cut is optimistic.” The FSCC went as far as saying that “most central banks do not take off the table the possibility of yet another rate hike.”

Higher-for-longer not a problem

The BSP is widely expected to match the timing of Fed’s easing moves to avoid pressuring the peso, which may upset the inflation outlook at home by pushing up import costs.

At its first meeting this year, the central bank’s Monetary Board kept its key rate unchanged at 6.5 percent, the tightest in over 16 years, as it waits for a more convincing downtrend of inflation before deciding on loosening its monetary policy settings.

Data showed inflation softened to 2.8 percent in January, the lowest reading in over three years. That was the second consecutive month that price growth moderated to within the BSP’s 2 to 4 percent target after hovering above that range for 20 months.

READ: PH inflation slowed to 2.8% in January

What’s worrying the BSP at the moment are higher transport charges and electricity rates, as well as costlier oil and domestic food prices. The central bank is also wary of the additional impact on food prices of a strong El Niño episode.

Growth outlook

The BSP also sounded more downbeat on the growth outlook, acknowledging that the tightening cycle would weigh on the consumption-reliant economy that grew 5.6 percent last year, missing the government’s growth target of 6 to 7 percent.

READ: Economic growth slowed in 2023, missed gov’t target

But Aris Dacanay, an economist at HSBC Research, believed that higher-for-longer rates in the US would not be a problem for the BSP as the local economy still posted a solid growth that outperformed its peers in the region.

“And we think the risk of an early rate cut is quite limited,” Dacanay said.

“With (the) Philippine GDP (gross domestic product) performing much better than what many had expected and with credit growth passing the trough, the BSP has the luxury of time to keep its policy rate tight long enough to see inflation really moderate to where the BSP wants it to be,” he added.