Photo courtesy of Bangko Sentral ng Pilipinas Facebook Page
The Bangko Sentral ng Pilipinas (BSP) is widely expected to keep its policy rate unchanged at its meeting this week on May 16, after inflation quickened again in April, although the uptick was not as bad as many had expected.
However, analysts polled by the Inquirer are divided on how the central bank would digest the below market consensus gross domestic product (GDP) expansion in the first quarter, as the economy’s growth engines begin to show signs of weakness amid tight financial conditions.
All nine economists forecast the BSP’s benchmark rate to remain untouched at a 17-year high of 6.5 percent, believing it’s not yet time to ease the ultra-tight monetary policy settings after inflation quickened for the third straight month in April.
Latest data showed inflation inched up to 3.8 percent in April, from 3.7 percent in March, on the back of high food prices amid the El Niño onslaught and expensive transport costs.
But the reading came out as a surprise after it fell below market expectations that had pegged April price growth at a faster 4.1 percent. The figure also settled close to the lower limit of the BSP’s forecast range of 3.5 to 4.3 percent for last month.
For analysts, this is enough reason for the BSP to maintain its tight grip on interest rates to avoid upsetting inflation expectations. Despite the April spike, inflation settled within the central bank’s 2 to 4 percent target range for the fifth consecutive month.
“The central bank will have been comforted by the fact that the rise was smaller than it had expected and that it still left inflation within the 2 to 4 percent target range,”said Gareth Leather, economist at London-based Capital Economics.
Separately, analysts at Chinabank believe that the BSP won’t cut rates ahead of the US Federal Reserve to avoid unnecessary pressure on the peso, which has been trading at 17-month lows against a strong dollar.
“We maintain our view that the BSP will not cut rates ahead of the Fed to avoid an unnecessary depreciation of the peso, which could contribute to inflationary pressures through higher import costs,” Chinabank said.
Hawkish or dovish?
Apart from the April inflation number, the Monetary Board (MB), the highest policymaking body of the BSP, would also take into account the weaker-than-expected GDP growth at their Thursday meeting.
The local economy grew 5.7 percent year-on-year in the first quarter, faster than the revised 5.5 percent expansion in the fourth quarter of 2023 but short of the Marcos administration’s 6 to 7 percent target.
The latest reading reported last week turned out weaker than the 6.4-percent growth recorded in the comparable period in 2023. It also fell below market consensus estimate of 5.9-percent growth in the three months through March.
A high-interest rate environment can slow the local economy, which historically gets 70 percent of its fuel from consumption. Data showed household spending growth had eased to 4.6 percent in the first quarter, from 5.3 percent in the final three months of 2023. This was the weakest reading since a 4.8-percent contraction at the height of COVID-19 pandemic in the first quarter of 2021.
For Capital Economics’ Leather, the softer GDP growth would likely prompt the BSP to turn dovish. INQ