BSP unlikely to cut rates in H1 – Remolona

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. has put a lid on speculations that BSP’s Monetary Board, its policy-making arm, is ready to ease its hawkish stance this year, or at least in the first six months of 2024.

“I would say it’s possible but maybe not likely,” he said on Saturday, Jan. 20, when he was asked of the possibility that BSP will start reducing its current 6.5 percent target reverse repurchase (RRP) rate, which is its policy rate, in the first semester.

Remolona said that while the data on inflation and other economic indicators are “looking good” and that “we like the trend so far” he is not encouraging further talk of rate cuts anytime soon.

The BSP chief, who arrived late Friday from Davos, Switzerland, where he attended the 54th Annual Meeting of the World Economic Forum (WEF), said the country’s consumer price index (CPI) is moderating but it is too soon to discuss an easing of monetary policy stance.

“We’re not out of the woods. We don’t see a smoking gun. Choose your metaphor. So that’s where we stand,” he told reporters attending the BSP’s media information session in Tagaytay, Cavite over the weekend.

The first Monetary Board policy meeting for 2024 is scheduled on Feb. 15. Unlike in previous years of a total eight meetings, the BSP only scheduled seven for this year. The BSP’s policy meetings are timed based on the US Federal Open Market Committee (FOMC) meetings, the preliminary release dates of the country’s national income accounts and inflation, as well as the data on money supply and the purchasing managers index.

Meanwhile, Remolona reiterated that BSP’s forecast for inflation in 2024 “is around 4-4.2 (percent)” and it is “not quite within range but close to within range” of the two percent to four percent government inflation target for the next three years.

“But supply shocks may derail that forecast including the imports of rice and El Niño is a factor. So it depends on those constraints,” he said. The effects of El Niño weather conditions continue to be a potential supply-side pressure to inflation this year and in 2025.

Remolona also said that “supply shocks have become very important to inflation outlook not just because of the shocks themselves — because the shocks themselves we expect them to dissipate — but because of the second-round effects from these shocks (which) we see in the prices of services, in wages and transport fares.”

Cues from Fed, other central banks

Since he just came from the WEF, the BSP chief noted that BSP like most central monetary authorities, have been closely monitoring each other in terms of the direction of interest rates amid a slowly recovering global economy.

“We’ve been watching what the other central banks have been doing especially what the Fed (US Federal Reserve) has been doing, and how the markets have been reacting to statements by the FOMC,” said Remolona.

He also noted that about “two meetings ago the market overreacted … and so FOMC tamped down the enthusiasm of the markets.”

“Now enthusiasm is back in the US because of very good numbers especially on the labor market. The prospects for a strong economy in the US as well as a soft landing for monetary policy seem brighter than before, that’s why we see the stockmarket going crazy,” said Remolona.

Any action from FOMC, which is the Fed’s branch that determines policy stance, will have an impact on BSP’s RRP rate. In one of the global economy sessions in Davos, Remolona said that it has been suggested the US economy will remain relatively strong.

“When we say strong, that’s 5%, 6% growth rate. For the US, 3% is a wonderful growth rate and that seems to be the case down the road. The labor market is surprisingly resilient. Our main destination for exports is still the US so that’s good for our trade balance and good for our economy,” he said.

Last month, Remolona has already signaled to the market that they will consider an easing of monetary policy stance only when the CPI is firmly within the mid-range of the target or around three percent. At the end of 2023, the CPI averaged at six percent, still way above the target of two percent to four percent.

The BSP chief said that when the inflation rate has “really settled into this comfortable rate” of three percent, then the BSP will discuss an easing of policy stance after raising the key rate by a cumulative 450 basis points since May 2022.

As of its Dec. 14, 2023 policy meeting, the data-dependent BSP forecasts a risk-adjusted inflation rate of 4.2 percent for this year and 3.4 percent for 2025. Risk-adjusted inflation forecasts take into consideration events or factors that are expected to happen at some point in time.

For the first quarter 2024, the BSP forecasts inflation will go below two percent based on base effects, but come the months of April to July – also because of base effects – inflation will rise above three percent.

Upside risks to inflation still persists such as higher transport fares, higher electricity and oil prices, and a higher-than-expected minimum wage adjustments in the National Capital Region.

The effects of El Niño is an evolving price pressure as well. Remolona has described this as a supply shock with a “very large” impact on monetary policy. In the first three months of this year, the BSP expects the drought or the prolonged dry period “will be bad” and may extend until the second quarter.

He said the El Niño is a supply shock “more or less we’re anticipating” and is already factored in their risk-adjusted inflation forecasts. — Lee C. Chipongian