Sticky inflation may delay BSP policy easing cycle
THE BANGKO SENTRAL ng Pilipinas’ (BSP) expected rate cuts could be delayed due to sticky inflation, according to BDO Unibank, Inc.
“When inflation begins to spike again as we saw in February and as we will see on Friday, then that delays the interest rate cut view because central banks will not cut interest rates if inflation is moving up,” BDO Senior Vice-President and Chief Investment Officer of its Trust and Investments Group Frederico Rafael D. Ocampo said at a briefing on Thursday.
“If you look at what happened in March, you had a series of fuel rate hikes as global oil prices burst $87 per barrel. And then you have food, especially rice prices, going up. Those two drove inflation. I’m fearful that the number will be higher than market expectations,” he said.
Mr. Ocampo said inflation may have breached the central bank’s 2-4% annual target in March due to high rice and oil prices.
The Philippine Statistics Authority will release March consumer price index (CPI) data on April 5, Friday.
The BSP this week said headline inflation may have settled within 3.4%-4.3% last month.
The upper end of the forecast would mark the first time in three months that inflation exceeded the BSP’s annual goal.
Meanwhile, the lower end of the forecast would be unchanged from 3.4% in February.
Still, year on year, inflation would be slower than 7.6% a year earlier.
On the other hand, a BusinessWorld poll of 17 analysts conducted last week yielded a median estimate of 3.8% for the March CPI.
This would mark the second straight month that inflation picked up on a monthly basis and the fourth straight month that the CPI was within the BSP’s goal.
Headline inflation averaged 3.1% in the first two months, below the BSP’s 3.6% baseline forecast and 3.9% risk-adjusted forecast for the year.
The BSP raised borrowing costs by 450 basis points (bps) from May 2022 to October 2023 to help tame elevated inflation. It has since kept its benchmark rate steady at a 17-year high of 6.5%.
The Monetary Board will hold its next policy review on April 8.
BSP Governor Eli M. Remolona, Jr. earlier ruled out a rate cut in the first half amid risks to the inflation outlook, but he said the BSP may start considering policy easing in the second semester of the year.
Mr. Ocampo said headline inflation could average 3.6% this year, slower than the 6% print in 2023, amid a high base.
However, risks from commodity supply shocks remain, he said.
A delayed rate cut by the US Federal Reserve could also cause the BSP to push back its own easing cycle to protect the peso, he added.
He said the BSP could slash rates by just 50 bps this year as the Fed is now only expected to cut by 50-100 bps versus the previous expectation of 250 bps.
“When the Fed does not cut in June as expected, then we will move closer to 50 bps,” Mr. Ocampo said.
The BSP will likely only begin its easing cycle when the headline inflation print is consistently within target, he added.
“When inflation goes down below 4% and turns into a trend, that’s when they will cut interest rates. Our view is it will be in the latter part of this year,” he said.
He said the BSP’s benchmark rate could be at 5.75% or 6% by the end of this year.
Meanwhile, the peso could appreciate to the P53-P54 level against the dollar as the Fed is likely done with rate hikes and with the current account deficit expected to narrow, Mr. Ocampo said.
However, the local unit could still see some weakness in the third quarter amid a seasonal rise in imports, he added.
“But the peso weakening cycle could come to an end this year and you will see the peso appreciating as the dollar strength ends globally,” Mr. Ocampo said.
BDO Trust and Investments Group sees the peso ending at P54.75 to P55 this year. — A.M.C. Sy
