BSP likely to stay hawkish – analysts

MONETARY authorities are expected to remain cautious and keep key interest rates elevated despite inflation having fallen to well within target last month, analysts said.

Consumer price growth was a better-than-expected 2.8 percent in January, having slowed from 3.9 percent in December to near the bottom end of the Bangko Sentral ng Pilipinas’ (BSP) 2.0- to 4.0-percent target.

The result, also the lowest since October 2020’s 2.3 percent, raised hopes that the central bank would now consider cutting interest rates, currently at a 16-year high after surging inflation triggered a tightening cycle that has now run for nearly two years.

The BSP called the January slowdown expected but reiterated warnings that inflation could accelerate anew in the second quarter. Policy settings will remain tight, it added, until price growth settles firmly within target.

Nicholas Antonio Mapa, senior economist at ING Manila, agreed that monetary policy would stay “sufficiently tight for the time being,” with a pivot only likely if inflation continues to slow in the second quarter.

Domini Velasquez, China Banking Corp. chief economist, said that January inflation would support a continued BSP pause next week and in subsequent policy meetings.

The central bank, she added, will “adopt a hawkish stance while abstaining from further rate hikes as the issue of elevated rice prices should be addressed through nonmonetary measures.”

“The decline in core inflation suggests a subsiding of demand pressures,” Velasquez noted.

“However, considering that inflation remains on the higher end, we think the BSP’s monetary board will take a cautious approach and may potentially consider policy rate cuts in the last quarter of the year.”

HSBC Global Research economist Aris Dacanay expects BSP moves to align closely with those of the Federal Reserve, with local policy rates to drop only after the

US central bank starts easing.

“Our baseline is for the Fed to begin its easing cycle in June 2024 and for the Fed to cut rates by 25 bps (basis points) in each quarter thereafter,” Dacanay said.

“But with growth in the Philippines strong, the BSP has room to cut much later than the Fed in the scenario of upside risks to inflation materializing all at the same time,” he added.

Gross domestic product growth was a below-target 5.6 percent last year but was still among the strongest in the region.