Dovish rate policy seen with recast inflation target

ANALYSTS from the Manulife Investment Management and Trust (MIMT) Corp. believe monetary authorities could ease key policy rates with the re-setting of inflation targets.

MIMT Head of Equities Mark Canizares said the Bangko Sentral ng Pilipinas’s (BSP) target of 2 percent-4 percent inflation opens up the possibility of easing rates policy and boosting economic growth this 2024. Canizares explained that a lower inflation environment would be supportive of sustained consumer confidence.

However, he warned that key risks remain with food supply shocks to be bourne by El Niño, the geopolitical risks and overall global economic slowdown.

“Lastly, we need to have a close look at the developments on artificial intelligence (AI) as it could have a significant impact on our Business Process Outsourcing (BPO) Industry,” he said.

According to Canizares, MIMT believes there is a strong likelihood that inflation will fall within the BSP’S 2-percent to 4-percent target this year, especially with the high base effect in 2023.

“In addition, a global economic slowdown due to the high interest rate environment could bring commodity prices lower, further easing our local inflation figures this year. Lower prices of soft commodities such as rice, wheat, cooking oil, etc would help bring out inflation in 2024 as food items account for a large component of our consumer basket,” he said.

MIMT Head of Fixed Income Jean Olivia de Castro pointed out that elevated interest rates and inf lation has forced the country to reduce its 2024 growth forecast from 6.5 percent-8 percent to 6.5 percent-7.5 percent, reflecting downside risks to growth.

“Should inflation continue to moderate, growth in household consumption might improve given the recent increase in minimum wage and decline in unemployment rate,” de Castro said.

She said MIMT expects household and government spending to be the main drivers for growth, with growth in household spending heavily dependent on the trend of inflation.

“However, while the BSP seems to be done with tightening, Governor Eli Remolona continues to temper expectations of rate cuts and to warn about upside risks to inf lation,” she said.

Just like in 2023, de Castro said elevated inflation and interest rates remain as the dominant risks for growth. She noted that growth in household consumption has been declining over the past year as high inflation erodes households’ purchasing power.

“Similarly, high interest rates also discouraged the private sector from borrowing, which has been dampening private investment, “de Castro said.