The Bank of the Philippine Islands said Friday it will be “too premature” for the Bangko Sentral ng Pilipinas to cut interest rates this year as the economy remains strong.
BPI said in a report inflation slowed down recently, allowing the BSP to pause its hiking cycle. It said inflation remained elevated with upside risks still posing a threat. The BSP kept the policy rate steady at 6.25 percent.
“Food supply remains vulnerable to shocks given the current productivity of the agriculture sector vis-à-vis the country’s population growth. The projected El Nino in the second half of 2023 may exacerbate this supply problem further,” it said.
Another upside risk to inflation, it said, is the strong demand in the economy amid its recovery. Establishments like restaurants and those engaged in services have a compelling reason to adjust their prices higher because of strong demand, and they need to compensate for previous months of high inflation.
“Considering these risks, it might be too premature to expect rate cuts later this year. Interest rates may need to stay elevated to bring demand closer to a level that matches supply. Core inflation remaining sticky near 8 percent suggests that the gap between demand and supply remains wide,” the bank said.
“Aside from this, it seems the economy doesn’t need additional stimulus at this time given the recent GDP data. Economic growth remains healthy at around 6 percent despite high inflation and the increase in interest rates,” it said.
The gross domestic product grew by 6.4 percent in the first quarter.
BPI said bringing inflation back to the target range of the BSP is a growth stimulus in itself, making the stimulus provided by rate cuts unnecessary at this point.
The bank also said it is uncertain if the Federal Reserve is done with its hiking cycle.
BPI said additional tightening on the part of the Fed was still within the realms of possibility.
“As seen in the past year, the peso is very sensitive to US monetary policy. Cutting interest rates at this time might be premature and it could lead to volatility in the foreign exchange market,” BPI said.
BPI also said now that the BSP had paused, its commitment to cut the reserve requirement to single digit could be delivered.
“The central bank has refrained from cutting the RRR as this may go against the rate hikes, which may confuse the markets. With inflation on its way down, there is a significant chance that the BSP may finally reduce the RRR soon,” the bank said.
Inflation peaked at 8.7 percent in January but eased in the succeeding months to 8.6 percent in February, 7.6 percent in March and 6.6 percent in April.
This brought the average inflation in the first four months to 7.9 percent, above the target range of 2 percent to 4 percent.