HSBC bets on late BSP rate cut

MANILA, Philippines — It is becoming more likely that the Bangko Sentral ng Pilipinas (BSP) will delay its rate cuts as inflation remains stubbornly high, HSBC Research said, adding that further raising rates will not work against supply-side price pressures and is unlikely to happen anyway.

In a commentary, Aris Dacanay, an economist at HSBC, said expectations of above-target inflation and a weak peso are preventing the BSP from cutting rates much sooner.

But he said the BSP could afford to be patient as the economy remains resilient in the face of tight financial conditions amid improvements in the local labor market and a resurgent credit growth that is funding consumption, a major source of juice for the economy.

READ: March inflation higher at 3.7% but still within gov’t target range

“Market players already expect headline inflation to breach the BSP’s 2 to 4 percent target band in the few months ahead due to base effects being unflattering. But how long will it remain above target?” Dacanay said.

“To better support the peso and tighten one’s grip on inflation expectations, the BSP will likely stick to its word and begin its easing cycle late this year. And the BSP can easily do this with robust growth,” he added.

Stubborn inflation

HSBC’s latest assessment took its cue from the recent pronouncements by Governor Eli Remolona Jr., who has already floated the possibility of a rate cut coming in the fourth quarter of 2024 or the first quarter of 2025 at the latest if inflation misbehaves.

That statement from the BSP chief dashed hopes for an easing that was previously expected to happen soon in the third quarter. Meanwhile, the room for an early loosening of monetary policy is also narrowing in the United States where inflation, as Remolona put it, was “more stubborn” compared to the situation here.

The BSP has so far kept its key rate unchanged at 6.5 percent, the highest in nearly 17 years.

READ: BSP tipped to keep interest rates steady

For HSBC’s Dacanay, local monetary policy settings could not get tighter at this point.

“We also downplay the risk of further rate hikes. Although inflation risks have emerged in the form of high oil and rice prices, these risks are supply-side in nature,” he said.

“Hence, the most efficient way to mitigate their potential impact is through supply-side interventions, not monetary policy. And nonmonetary authorities are already on top of this,” he added.