Early cuts ‘possible but maybe not likely’

POLICY rate cuts could start earlier than currently expected but monetary authorities will likely not act given continued inflation risks, Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. said.

“I would say it’s possible but maybe not likely,” Remolona told reporters on Saturday, noting that supply disruptions could lead to inflation again breaching the BSP’s 2.0- to 4.0-percent target.

Inflation eased to 3.9 percent in December but the full-year average was still above target at 6.0 percent. Analysts have warned that it could pick up in the next few months due to factors such as a stronger-than-expected El Niño and increased geopolitical tensions, with rate cuts only likely to start after the US Federal Reserve begins easing policy.

Remolona said inflation was “within striking distance” given a “baseline” 2024 forecast of “around 4.0 or 4.2 percent,” but added that “supply shocks may derail that forecast, including what’s going on with rice …”.

It was not immediately clear if the central bank had adjusted its baseline forecast for this year, previously said to be a within-target 3.7 percent. In December, during its last policy meeting for 2023, the BSP’s Monetary Board lowered the risk-adjusted forecast for this year to 4.2 percent from 4.4 percent.

Monetary officials at that time also said that monetary policy settings would have to be kept “sufficiently tight to allow inflation expectations to settle more firmly within the target range.”

While headline inflation may have eased in December, food inflation remained high at 5.5 percent, albeit down from 5.8 percent a month earlier. Rice inflation, however, surged to 19.6 percent from 15.8 percent and contributed 1.7 percentage points to overall inflation.

“[S]upply shocks are very important for the inflation outlook, not because of the shocks themselves — we expect them to dissipate — but because of the second round effects from those shocks,” Remolona said.

“They affect expectations and those expectations affect second round effects which we see in prices of services for example, in wages, transport fares,” he added.

“So, we’re not out of the woods. We don’t see [the] smoking gun. Choose your metaphor.”

The BSP’s benchmark rate currently stands at 6.5 percent, the highest since 2007, following 450 basis points of rate hikes beginning May 2022 as inflation started surging in the wake of Russia’s invasion of Ukraine.

The Monetary Board began pausing in May last year as inflation started easing from January’s 14-year high of 8.7 percent. An August-September reversal, however, prompted an off-cycle 25 bps increase in October.

It resumed pausing in November and December and is expected to keep interest rates unchanged when it meets for the first time this year on February 15.

Analysts have said that rate cuts will likely only start in the second semester and only after the US central bank starts its own pivot. The timing, however, remains uncertain despite the Fed having indicated the possibility of 75 bps of rate cuts this year.

Remolona’s acknowledging the possibility of much-earlier rate cuts contrasts with previous statements. The central bank chief was also tagged by an economist last week as a “hawk” who favored keeping rates high for longer.

In contrast, former Finance secretary and new Monetary Board member Benjamin Diokno, who was Remolona’s predecessor as BSP chief, was described as dovish given statements that rates could be cut by as much as 100 bps this year.

ING Bank senior economist Nicholas Mapa, who said that it was time to start counting hawks and doves at the Monetary Board, said this year’s policy direction could come down to swing votes in the seven-member body.

A return to using baseline inflation forecasts for policy decision-making, Mapa said, could allow doves to argue for a rate cut shortly after the Fed begins lowering its own rates.

“On the other hand, [if] a potential flare-up in global crude oil prices and extensive crop damage manifests due to El Niño, we could see the BSP’s own pivot delayed to the back end of the year,” he added.

“So in short, this early in the year, anything can happen.”