BSP slams brakes on rate hikes as inflation slows

MANILA, Philippines (Updated, 4:52 p.m.) — The Bangko Sentral ng Pilipinas kept its policy rate unchanged in May, a first since the central bank unleashed aggressive rate hikes last year to combat inflation. 

After the Monetary Board convened on Thursday, the BSP maintained interest rates at 6.25%. This proved to be a change of pace for the central bank, which began tightening its monetary policy in May last year. 

The BSP has so far injected 425 basis points into its key policy rate, which banks and financial institutions use as a benchmark for handing out loans.

So far, consumer price growth has slowed down in the past three months after hitting 14-year highs towards the end of 2022. Painful inflation dictated the Philippine economy’s prospects in the past year, as supply chain bottlenecks, a weak peso, and expensive fuel prices threatened growth. 

A BusinessWorld poll on Monday showed 13 out of 18 analysts anticipated the BSP to maintain interest rates.

"Based on the sum of new information and its assessment of the impact of previous monetary policy actions, the Monetary Board decided that a pause in monetary policy tightening was appropriate," Governor Felipe Medalla said.

"The Monetary Board also noted that while GDP growth has remained robust in the first quarter of 2023, demand indicators have also pointed to a potential moderation in the recent months, suggesting that previous policy rate increases by the BSP continue to work their way through the economy," he added.

Central banks, like the BSP, use rate hikes to rein in demand pressures that are stoking price growth. The higher interest rates work by prompting consumers and businesses to think twice about borrowing money. This, in turn, lessens the money that’s circulating in the economy and chasing a limited supply of consumer items.

]But Jun Neri, lead economist at Bank of the Philippine Islands, made the case for another round of hikes. 

“A hike would have still been the prudent choice as core inflation remains near a 2-decade high even as headline has declined rapidly,” he said in a Viber message ahead of the central bank's announcement. 

Core inflation, computed without volatile items such as fuel, averaged 7.8% in the first four months. 

Nicholas Antonio Mapa, senior economist at ING Bank in Manila, projected ahead of the Monetary Board’s meeting that the BSP would pause hikes. 

“We expect BSP then to telegraph an RR reduction at the June meeting and consider rate cuts but only if the Fed starts cutting their own policy rates as BSP will look to maintain interest rate differentials,” he said in a Viber message. 

2-3 meetings of pause

The benchmark rate is expected to stay put for a few months, as the BSP expects headline inflation to cool further by September or October.

The central bank revised its inflation forecast downward for this year and the next. In 2023, they expect consumer price growth to average 5.5%, from the 6.1% it previously set at the February meeting of the Monetary Board. If realized, the updated inflation outlook for this year would still breach the BSP’s annual target of 2-4%.

In 2024, the BSP forecast headline inflation would average 2.8% from the old projection 3.1%.

Medalla said that the BSP is unlikely to touch the key rate for the next two or three policy meetings. The central bank penciled in five more Monetary Board meetings before the year is over.

“The problem is if the US is raising policy rates, and we’re cutting, the market seems to see that as a trigger to a significantly weaker peso,” Medalla said in a briefing.

RRR cuts

Medalla also reassured concerns surrounding a looming cut on the reserve requirement ratio that banks have to meet.

The BSP governor reckoned the “best time” to do any RRR cuts is on June 30, hoping to increase the loans for micro, small and medium enterprises to help them recover from the pandemic’s onslaught.

“Now the economy is normally open, then it’s a good time to let the relief measure expire,” Medalla explained.

That said, Miguel Chanco, chief Emerging Asia economist at Pantheon Macroeconomics, expects the BSP to begin rolling back pandemic-era measures, starting with a 50-basis point cut on the key rate in the final quarter.

“Philippine economic momentum clearly is ebbing, and we believe that full year GDP growth this year will come in at 5.5%, down from 7.6% last year, and more than a percentage point below the pre-pandemic pace,” Chanco said in an emailed commentary.