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BSP expected to keep rates steady until second quarter of 2024

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The Bangko Sentral ng Pilipinas is expected to keep interest rates steady until the second quarter of 2024, before starting to cut rates, according to Oxford Economics.

Oxford Economics, a global economic forecasting and econometric analysis agency, made this forecast after the BSP kept its main policy rate at 6.5 percent Thursday, citing a lower-than-expected inflation in October and reduced pressures on inflation expectations.

“We continue to expect the central bank to remain on hold until Q2 2024, when BSP will likely shift to rate cuts. Declining inflation should keep BSP on the sidelines until then. The risks are tilted to a delayed start to the rate cut cycle given inflation volatility and our expectation for the US Fed to start cutting only in Q3 2024,” said Oxford Economics economist Makoto Tsuchiya.

Tsuchiya noted that after an off-cycle rate hike in October, the BSP decided to maintain its overnight reverse repurchase rate at 6.5 percent due to less concern over inflation expectation dislodging after CPI came in lower than expected in October at 4.9 percent year-on-year.

“Although this is still higher than the 2 percent to 4 percent target band of the central bank, it was firmly below the BSP’s estimate of 5.1 percent and 5.9 percent. The bank remains hawkish, noting risks to inflation until 2025 are tilted to the upside, especially given the geopolitical conflicts and supply-chain vulnerabilities, including weather-related ones,” Tsuchiya.

Tsuchiya said the gross domestic product growth of 5.9 percent in the third quarter allowed the BSP to remain hawkish. “The central bank noted the growth prospect largely remains intact, which signals its continued commitment towards bringing inflation under control with less attention on the impact on growth,” he said.

“While BSP will likely be quick to act should inflation expectation become de-anchored, our baseline assumption is that it will not need to. We continue to expect the central bank to remain on hold until Q2 2024 before starting to cut rates. That should be enabled by slower price momentum thanks to retreating oil and food prices and weaker economic growth,” Tsuchiya said.

Meanwhile, Ryota Abe, an economist at Sumitomo Mitsui Banking Corp. said the BSP was expected to hold the rates steady at the next Monetary Board meeting on Dec. 14. “However, as the outcome will still be data-dependent, attention will be on the November CPI on Dec. 5,” Abe said.

“Consumers’ one-year-ahead inflation expectations have surged from 5.18% in the second quarter to 6.64 percent in the third quarter. Consumers’ sense of high prices has not yet been resolved, and the risk of further stickiness of inflation cannot be ignored as upward price pressures arising from supply-side factors trigger secondary price increases, which is what BSP fears. BSP has no choice but to continue its hawkish monetary policy for the time being,” Abe said.


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