BSP rulls out interest rate cut this year

A rate cut is not on the table given the expectations of within-target inflation in the last quarter of 2023 and still strong domestic output, Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona said in a report by Philippine News Agency,

In an interview over Bloomberg Television Friday, Remolona said “upside risks seem more likely than usual so that, to me, seems like there’s a good chance for a hike the next time.”

“I wouldn’t say it’s being considered for the next meeting. The next meeting is in November. Rate cuts are not on the table for the next meeting but rate hikes are,” he said.

On Thursday, the BSP’s policy-making Monetary Board (MB) kept for the fourth consecutive rate setting meeting the central bank’s key rates, with the target reverse repurchase (RRP) rate at 6.25 percent after noting the rise of the inflation path relative to past assessments.

This, after the August 2023 inflation rate accelerated to 5.3 percent from month-ago’s 4.7 percent, ending a six-month slide.

The average inflation to date stood at 6.6 percent, way higher than the government’s 2 percent to 4 percent target band.

Remolona said there was a unanimous decision among the seven-man MB to keep the BSP key rates steady on Thursday even with the inflation uptick last August because even if the “last number that came in was worse than before but it wasn’t enough for us to hike this time.”

  

“So, we’ll see. We’ll have to watch the numbers,” he said.

The BSP chief said monetary authorities are primarily considering as additional upside risks to inflation the transport fare hike petitions, which are “very likely that it will go through” and the power rate hikes, “that’s also very likely, we think.”

“Those two things could add something like 0.5 percent to the forecast of inflation for 2024,” he added.

The Board hiked on Thursday the BSP’s average inflation forecast for 2023 from 5.6 percent to 5.8 percent and the 2024 projection from 3.3 percent to 3.5 percent due to recent developments.

It kept the BSP’s 2025 average inflation forecast at 3.4 percent.

Remolona said the policy decision of the United States Federal Reserve “is not a big factor this time”, citing the Fed’s dovish stance for this year and hawkish position for 2024.

He said the latest performance of the local currency is “not that much of a factor” in the latest MB decision as it was last year when it was depreciating after the series of rate hikes by the Fed.

Remolona said that although the peso is weakening against the US dollar, “the weakness seems not to come from the difference in policy rates between us and the US (but) it comes more from uncertainty about the economic outlook. “

“It’s not so much peso weakness, it’s more dollar strength. With more uncertainty, there is (a) more safe-haven factor that makes investors go into the dollar,” he added.

“Currency protection is a small thing for us at this point. The currency hasn’t depreciated, not too different from what fundamentals would say. It’s more of a risk thing. When the data comes out and the data are mixed, or when the minutes of the FOMC (Federal Open Market Committee) come out and they’re not consistent with the earlier statement, there’s a bit of uncertainty that comes into the currency market.  And that tends to weaken not just the peso but other emerging market currencies as well,” he said.

In terms of the BSP’s rate decisions vis-à-vis the domestic output, Remolona said the lag of the policy decisions is expected until the first half of 2024.

“At this point, when you look at our output gap, which is one way to measure whether we are restrictive, the output gap now is basically zero. So another hike would mean falling below potential. But that’s a price we may have to pay if inflation is too high,” he said.

The country’s gross domestic product slowed for the third consecutive quarter this year to 4.3 percent, partly due to elevated inflation rate.

The average growth in the first half of this year stood at 5.3 percent, lower than the government’s 6 percent to 7 percent target band.

Remolona said supply shocks, which are greatly affecting the inflation rate, “seem to dissipate very quickly.”

“But the problem is there tend(s) to be new supply shocks. And so the lags from supply shocks on inflation seem to be relatively short, except that they seem to be relentless. They keep coming. And so that’s what keeps our inflation rate high,” he added.

Should the MB hike the BSP’s key rates during its November 2023 meeting, Remolona said “we’re not convinced (that) it would be the last one, won’t be the last hike in the cycle.”

“We’re not convinced that as far as (policy rate) cuts go, output numbers will have to be pretty bad, (and) inflation numbers to be pretty low for us to consider rate cut(s) next year,” he added.