Key rates kept as inflation eases


WITH inflation on track to meet expectations, the Monetary Board has decided to maintain the Bangko Sentral ng Pilipinas (BSP) key policy rates on Thursday.

The BSP’s overnight reverse repurchase facility rate was kept at 6.25 percent. The interest rates on the overnight deposit and lending facilities were thus retained at 5.75 percent and 6.75 percent, respectively.

This is the second time the Monetary Board decided to pause its interest rate hike, which was earlier regarded as the most aggressive monetary policy stance in the region.

“The BSP’s latest baseline projections continue to suggest a gradual return of inflation to the target band of 2-4 percent over the policy horizon,” BSP Governor Felipe M. Medalla said in a briefing.

“Both headline and core inflation decelerated further in May due mainly to slower increases in the prices of food and energy-related items, affirming expectations of a return to the target range by year’s end,” he added.

While this is the second time the Monetary Board paused its interest rate hike, Medalla said it is not likely that the BSP will cut key policy rates any time soon.

Medalla said it may take at least two to three more months of slower inflation before any reduction in the interest rates is considered, given the upside risks to inflation.

These risks, the BSP said, include additional transport fare increases and minimum wage adjustments, persistent supply constraints of key food items, and the El Niño weather conditions; and the possible knock-on effects of higher toll on agricultural prices.

The weaker-than-expected performance of the global economy could be a factor dragging down commodity prices further.

In the Philippines, the BSP’s own assessment points toward a growth of around 6.2 percent this year. However, this remains indicative based on existing data.

Inflation expectations

The BSP said average inflation for 2023 is projected to settle at 5.4 percent, slightly lower than 5.5 percent previously, while the average inflation forecast for 2024 now stands at 2.9 percent from 2.8 percent.

For 2025, inflation is expected to average at 3.2 percent. BSP Deputy Governor Francisco Dakila Jr. said this is a forecast that is model-driven and is based on the outlook for oil prices; futures of non-oil commodities; global growth outlook; and assumptions with respect to wage adjustments. 

The BSP said the coming El Niño was not yet included in the baseline expectations of the BSP. However, Dakila said this may lead to only a 13- basis-point increase in inflation, which is not deemed significant.

“While the domestic growth momentum is expected to remain intact over the near term, recent demand indicators suggest a likely moderation in economic activity over the policy horizon, reflecting the impact of the BSP’s cumulative policy rate adjustments as well as weak global growth prospects,” BSP said.


Rizal Commercial Banking Corporation Chief Economist Michael L. Ricafort said that while the BSP decided to pause interest rate hikes, the key policy rates remained the highest in more than 16 years or since May 2007 when it was at 7.5 percent. This also matched the US Federal Reserve’s recent decision to pause interest rate hikes.

Ricafort said US inflation significantly eased further toward the 2-percent target in the coming months of 2023, and there is a chance for Fed rate cuts as early as the latter part 2023 and into 2024.

This is because it is expected in the financial markets and suggested by the latest Fed estimates, so cuts in BSP policy rates are expected to follow any Fed rate cuts, prospectively.

BPI’s take

Meanwhile, in an economic brief, Bank of the Philippine Islands (BPI) agreed with BSP that if current trends continue, inflation may finally return to the BSP’s target by October.

BPI noted oil prices have been stable recently and food supply has improved given the recent harvest season.

However, BPI said upside risks remain and could delay the slowdown in the country’s inflation rate. One of these risks is the resurfacing of supply chain issues in light of the El Niño.

BPI also stressed that strong demand may encourage firms, especially those in services, to continue hiking their prices as they adjust further to previous months of high inflation.

“Despite the recent pause by the BSP, it might be premature to conclude that the hiking cycle is over. One or two more rate hikes are still possible for the rest of the year depending on how the FX market will react in case the Fed hikes again,” BPI said.

“It might be too premature also to expect rate cuts later this year. With the Fed still keeping its hawkish stance, it might be difficult to cut rates while minimizing the impact on the currency,” it added.

Oxford Economics

For its part, Oxford Economics said the central bank may keep the rate at the current level this year before cutting it starting in the first quarter of 2024.

Oxford Economics expects CPI inflation to continue declining, settling well below the BSP’s mid-point target of 3 percent by the first quarter.

“While we remain bullish on the US dollar, several factors work in favor of some resilience in the peso. Our US team expects the US Fed to remain on hold for the rest of the year before cutting in Q1, which will keep the interest rate differential stable,” Oxford Economics said.

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