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Case for pause in BSP tightening cycle builds

Citizens walk past a mural at the Lagusnilad Underpass in Manila, May 7. — PHILIPPINE STAR/EDD GUMBAN

By Keisha B. Ta-asan, Reporter

THE SLOWER-THAN-EXPECTED inflation outturn in April may prompt the Bangko Sentral ng Pilipinas (BSP) to keep policy rates unchanged at 6.25% when it meets later this month.   

However, the impact of El Niño to food prices, further tightening from the US Federal Reserve, and strong domestic demand, are factors that should still be considered on the central bank’s May 18 policy meet, according to an official.

Monetary Board (MB) member Bruce J. Tolentino said a pause in rate hikes is “in the cards” at their policy meeting this month.

“If all of a sudden, food prices fell much greater due to some miracle, then we might not [raise interest rates]. Again, as we always say, it depends on the data,” he said during a seminar hosted by the Economic Journalists Association of the Philippines on Saturday.

As inflation remains elevated, Mr. Tolentino said a 25-basis-point (bp) rate increase is still possible at the MB’s May 18 meeting.

Based on data from the local statistics agency, headline inflation rose by an annual 6.6% in April, from 7.6% in March. It was the slowest in eight months or since the 6.3% print in August 2022.   

For the first four months of 2023, inflation averaged 7.9%. This is still above the central bank’s 6% average forecast for 2023.   

To curb inflation, the BSP has raised borrowing costs by 425 bps since May last year, bringing the key policy rate to 6.25% — the highest since 2007.   

Miguel Chanco, chief economist for emerging Asia at Pantheon Macroeconomics, said not only did the headline print settle within the BSP’s 6.3-7.1% forecast range for April, but core inflation fell for the first time in over a year as well.   

“We’ve said for some time that the surge in core inflation will take care of itself once non-core pressures start to unwind, as this gauge still contains a lot of food items and those that are sensitive to oil prices,” Mr. Chanco said.   

Core inflation, which excludes volatile prices of food and fuel items, slightly slowed to 7.9% in April, from the 8% print in March.   

“Given April’s sharp deceleration in headline inflation and peaking core inflation, we think it represents a further significant step in the direction of a rate pause at 6.25%,” Security Bank Corp. Chief Economist Robert Dan J. Roces said.   

Even though headline inflation is on track to return within the BSP’s 2-4% target by the end of the year, he said risks remain.

“Core (inflation) may remain above the headline (inflation) in the next three months. The threat of El Niño and food supply pressures are rising, with global rice and sugar prices trending higher,” Mr. Roces said.   

Asked if El Niño may drive up inflation, BSP’s Mr. Tolentino said that it would depend on the extent of the weather disturbance’s impact on agriculture.

“If it hits early in the planting season, that means most of the crop will be wiped out. (If) it hits later than [that], a smaller level of the crop will be affected. It would also depend on where the drought will be. Sometimes, it’s just one part of the country,” he said.

The state weather bureau said last week that El Niño would likely develop in the next three months and might last until the first quarter of 2024.

Meanwhile, Mr. Tolentino said the BSP will also consider the US Federal Reserve’s move to raise rates by 25 bps last week.   

“The actions of the Fed are always a factor that we need to consider because if the [interest rate] differential between US rates and Philippine rates are higher, then it attracts money to go to the US,” he said.   

The US Federal Reserve has raised borrowing costs by 500 bps since March last year, bringing the Fed fund rate to 5-5.25%.

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said inflation is still a threat despite the recent downtrend. If the MB decides to pause, he said it would be “premature” to expect rate cuts in the succeeding meetings.   

“Establishments have an incentive to raise prices because demand remains strong. Cutting rates at this point will unnecessarily boost demand at a time when supply continues to be a risk,” Mr. Neri said.   

A BusinessWorld poll of 23 economists conducted last week yielded a median estimate of 6.1% gross domestic product (GDP) growth for the first quarter of this year. This is near the lower end of the government’s 6-7% full-year target.   

If realized, this would be slower compared with the 8% growth recorded in the same period last year, and the revised 7.1% expansion in the fourth quarter of 2022.

“A recession in the US may force the Fed to cut its rates, and the BSP will likely follow in this scenario,” Mr. Neri said.   

He noted the peso’s performance for the rest of the year largely depends on the US Federal Reserve. If the economic activity in the US weakens, he said the Fed may pause more quickly or cut interest rates earlier than projected.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said headline inflation should continue to edge lower in the next months.   

“BSP will be banking on supply-side remedies and the lagged impact of previous tightening to address sticky core inflation,” he said, adding that the policy tightening has already affected bank lending.   

Based on BSP data, outstanding loans by big banks grew by 10% to P10.69 trillion in February from P9.72 trillion a year earlier. The February loan growth is a tad weaker than the 10.4% growth in January and is slowest credit growth in 11 months.

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