BSP likely done hiking key rates

KEY interest rates may have peaked and remain unchanged well into next year amid continued risks to the inflation outlook, analysts said.

Monetary authorities decided to resume pausing last week following an unscheduled 25-basis point (bps) hike that brought the Bangko Sentral ng Pilipinas’ (BSP) policy rate to 6.5 percent, the highest since 2007.

A more moderate inflation outlook was cited as having prompted the move to keep interest rates on hold.

The central bank’s policymaking Monetary Board, however, also said that settings would remain tight until a sustained inflation downtrend “becomes fully evident and inflation expectations are firmly anchored.”

Consumer price growth forecasts were tweaked and monetary authorities said they would allow prior rate hikes to continue working their way through the economy.

Adjustments totaling 450 bps since May of last year have weighed on economic growth and the BSP also said that growth for this year and the next could fall below government targets.

Depending on the data, the central bank said it was “prepared to resume monetary policy tightening as necessary to steer inflation towards a target-consistent path, in line with its price stability mandate.”

Notwithstanding this, China Banking Corp. chief economist Domini Velasquez said “we are likely at a peak policy rate already, which we expect the BSP to maintain until late next year when inflation is firmly within target.”

“We still maintain our view that the BSP might hold its target policy rate at 6.5 percent until the fourth quarter of next year given that inflation will likely print above the target until the second half of the year,” she added.

Pantheon Macroeconomics chief Emerging Asia economist Miguel Chanco, meanwhile, said inflation could markedly fall in 2024, prompting the BSP room to lower rates by 100 bps points next year.

“If we’re right about both the extent of disinflation and consequent rate cuts in 2024, monetary policy would still tighten noticeably on an inflation-adjusted basis from current levels,” he added.

The BSP last week said that the risk-adjusted inflation forecast for 2024 had been lowered to 4.4 percent, from 4.7 percent in October, while that for 2025 was also trimmed to 3.4 percent from 3.5 percent.

The revised baseline forecast for 2024, meanwhile, fell within the 2.0- to 4.0-percent target at 3.7 percent but was higher relative to the 3.3 percent seen in August.

This was due to “higher-than-expected inflation outturns, higher inflation nowcast over the near term, approved transport fare increase, impact of moderate El Niño weather conditions, and uptick in global crude oil prices,” the BSP said in its latest monetary policy report (MPR).

The baseline forecast for 2025, on the other hand, was cut to 3.2 percent from 3.3 percent, mainly reflecting an expected strengthening of the peso following negative base effects.

Inflation expectations were also said to have moderated slightly but remained elevated.

The BSP said that a November survey of private sector economists led to a lower mean inflation forecast for 2024 of 4.0 percent, down from 4.1 percent in October.

The mean forecasts for 2023 and 2025 were unchanged at 6.1 percent and 3.5 percent. The BSP has a 6.0-percent baseline forecast for this year.

Higher fares, power rates, and food and fuel prices; higher-than-expected minimum wage hikes in areas outside Metro Manila, the non-extension of a Palace order that temporarily lowered tariffs on some key commodities, the impact of a strong El Niño were tagged as major upside risks to the inflation outlook.

The Monetary Board raised its outlooks for gross domestic product growth but said the results could fall below the 6.0- to 7.0-percent goal for 2023 and 6.5-8.0 percent for next year and 2025.

Details were not disclosed but the BSP said “the estimated growth path reflects primarily the impact of subdued global economic conditions as well as the lagged impact of the policy rate adjustments.”

“Nevertheless, the full-year growth forecasts for 2023 to 2025 have been adjusted upwards from the previous MPR, reflecting largely the faster-than-expected growth outturn in Q3 2023, supported by consumer and government spending and by higher growth nowcast for Q4 2023,” it added.

“This could be offset partly by the impact of higher real policy rate as well as the estimated impact on agriculture of El Niño weather conditions.”

GDP growth was a higher-than-expected 5.9 percent in the third quarter but the year-to-date expansion remains below target at 5.5 percent.