BSP rate likely still steady — economists

Economists expect the Bangko Sentral ng Pilipinas (BSP) to maintain its 6.5 percent policy rate in its Monetary Board meeting next week due to foreign exchange risks and sticky inflation.

“The peso’s fragility, exacerbated by external economic pressures and capital outflows, makes a compelling case for maintaining higher interest rates to support the currency and mitigate potential inflationary pressures from further depreciation,” Security Bank chief economist Dan Roces said in an email.

Inflation last month rose again to 3.9 percent from 3.8 percent in April, according to the Philippine Statistics Authority. The inflation uptrend has existed since January’s 2.8 percent due to higher food and energy prices.

The BSP raises its policy rate for private banks’ interest rates to lower inflation by restraining consumer demand for goods and services, while non-financial government agencies help by ensuring their sufficient supply to the market.

It aims to stabilize inflation closer to the lower end of its target range of two to four percent.

Start declining in Q3

Roces expects inflation to start declining in the third quarter where the wet weather occurs, increasing production of certain foods like rice.

“Despite inflation expectations trending lower, headline inflation continued to rise in May. We need more data to see that it will trend lower,” Jonathan Ravelas, senior adviser at Reyes Tacandong & Co., said.

Meanwhile, the peso has breached P58 per one US dollar since 21 May based on data from the Bankers Association of the Philippines.

The peso yesterday reached a high of P58.68, relatively lower than the P58.80 recorded on 10 June.

“The US dollar/peso exchange hovered among 19-month highs since November 3, 2022 that could lead to some pickup in importation costs and overall inflation,” Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said.

The peso continued to depreciate after the US Federal Reserve had signaled a longer delay in easing its own policy rate. It announced a steady rate last week.

“Number one driver for the BSP to move, I believe, is still what the US Federal Reserve wants to do. We see this around the world among global central banks seemingly hesitant to start cutting rates ahead of the US Federal Reserve and I do not expect the BSP to be no different,” Union Bank of the Philippines chief economist Ruben Carlo Asuncion said.

Strong demand for $-dominated investments

The economists said cutting the BSP rate earlier than the foreign central bank’s could further weaken the peso due to stronger demand for US dollar-denominated investments.

The Federal Reserve is set to announce any rate adjustment in September and December.

A Reuters’ survey of market analysts says the Federal Reserve will likely cut its rate in December.

“The timeline for the BSP is sufficiently distant to justify a cautious approach at this juncture,” Roces said.

“Furthermore, the Federal Reserve’s recent monetary policy pronouncements could also influence the BSP’s stance, as synchronized actions may be necessary to manage cross-border financial stability and prevent disruptive capital movements,” Roces added.

Asuncion agreed the BSP does not need to rush its own rate cuts as the country continues to attract foreign investments, contributing to gross international reserves. This allows the Philippines to fulfill external transactions and obligations.