BSP may cut rates by mid-2024

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may start cutting interest rates as early as June this year, according to economists.

ING Bank senior economist Nicholas Mapa said the central bank would likely retain its hawkish stance in the near term, possibly keeping policy rates untouched until the US Federal Reserve carries out its own rate cut.

As widely expected, the BSP Monetary Board decided to leave interest rates unchanged during its first policy meeting this year after raising key policy rates by 450 basis points between May 2022 and October 2023 to tame inflation and stabilize the peso.

After emerging as the most aggressive central bank in the region, the BSP kept interest rates steady in November, December and January as inflation eased to its lowest level in three years, at 2.8 percent in January from a peak of 8.7 percent in January 2023.

With the inflation downtrend, the BSP lowered its risk-adjusted inflation forecast for this year to 3.9 percent from 4.2 percent, but raised its view for 2025 to 3.5 percent from 3.4 percent.

Likewise, it also slashed its baseline inflation forecast for this year to 3.6 percent from 3.7 percent, but kept its projection for 2025 at 3.2 percent.

With the risk-adjusted inflation forecast already within target, Mapa believes the BSP now has scope to discuss potential easing possibly as early as mid-year.

“Should headline and core inflation continue to slide and barring any potential supply side shocks, we believe that the BSP can adjust policy rates ASAF (as soon as the Fed does),” Mapa said.

The Dutch financial giant expects the Fed to cut policy rates either in May or June.

“We expect that the BSP could consider cutting its policy rate as early as the June 27 policy meeting,” Mapa added.

Aris Dacanay, economist for ASEAN at HSBC, reiterated that the BSP has the “luxury of time” to keep interest rates elevated.

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

According to Dacanay, the country’s gross domestic product (GDP) is expanding at a much faster pace.

“With Philippine GDP 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.

The British banking giant expects the Fed to deliver its first cut in June.

With the national savings rate in the Philippines still recovering and the current account deficit still wide, HSBC believes the BSP would not be able to cut ahead of the Fed without leading to much volatility in the peso, which is a risk to inflation in itself.

“That said, our baseline view is for the Fed to begin its easing cycle in June this year. And we expect the BSP to follow the Fed, cutting its policy rate thereafter,” Dacanay said.

Euben Paracuelles, chief ASEAN economist at Nomura, said the BSP has shifted to a less hawkish tone after pronouncing earlier the need to retain policy setting sufficiently tight until a sustained downtrend in inflation becomes evident.

“That said, this comment replaced the line in the previous policy statement that BSP sees the need to keep policy settings sufficiently tight. This replacement would indicate a less hawkish tone than in the previous two meetings and is somewhat surprising given our view that it would retain the sufficiently tight language,” Paracuelles said.