(Bloomberg) — The Philippine central bank is widely expected to keep its benchmark interest rate steady at a 17-year high on Thursday, with focus shifting to whether monetary easing will begin ahead of the US Federal Reserve’s.
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All 22 economists in a Bloomberg survey expect the Bangko Sentral ng Pilipinas to maintain the target rate unchanged at 6.5% for a sixth straight meeting.
Despite inflation hovering close to the upper end of BSP’s 2%-4% target range, price gains have remained within goal since the end of last year. That’s made policymakers open to supporting the economy by unwinding some of their 450-basis points of rate tightening post-pandemic.
The question is whether Governor Eli Remolona will stick to his previous signal for a rate cut as early as August — which, if it materializes, could see the BSP preempt the Fed in driving borrowing costs down.
“We cannot sleep on the fact that the Philippines’ monetary policy is becoming more independent from the Fed,” said HSBC Holdings Plc economist Aris Dacanay in a June 19 note, adding that the economy’s fundamentals are boosting the BSP’s confidence to ease before the US does.
Here are key things to watch at the briefing in Manila at 3 p.m.:
Inflation Expectations
Despite accelerating for the past four months, inflation has so far defied expectations of a target breach this quarter, due in part to easing rice prices. Lingering risks from food and energy costs could, however, push inflation above goal until July.
Still, the BSP has signaled confidence that average 2024 inflation will hit the target after missing the mark for the past two years. Lower tariffs on rice imports will support the central bank’s view that price pressures will likely ease later this year.
Economic Growth
While economic prospects for this quarter remain robust, the BSP has flagged that gross domestic product growth may decelerate in the second half. That’s partly due to past rate hikes, which have crimped consumption and investments.
The dimmer economic outlook for the coming months poses a challenge to the government’s goal of at least 6% GDP expansion this year, which is also up for review on Thursday. Still, the Philippines remains among the region’s fastest-growing economies.
With inflation still within goal, the BSP “is shifting focus to growth,” said Barclays Plc regional economist Shreya Sodhani. “That’s what is going to drive rate cuts once inflation is durably within target band,” she said, adding that she expects the BSP to start cutting rates in October.
Peso, Fed
The peso’s slump amid the US dollar’s strength will, however, keep rate-setters on guard. Lowering borrowing costs ahead of the Fed could further weaken the currency and fan inflation in a country that imports its fuel and rice needs.
The local currency has hovered for nearly a month close to a record-low of 59 against the greenback. It’s also among the worst-performing currencies in Asia this quarter.
Members of the rate-setting board are split on rate-cut timing in relation to the Fed: Remolona and his colleague Benjamin Diokno are open to moving before the Fed, while Finance Secretary Ralph Recto favors waiting for the US to ease first.
–With assistance from Shinjini Datta.
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