Philippines: The BSP on prudent and hawkish pause

BSP on hawkish pause
Group Research, Chua Han Teng19 May 2023
    Photo credit: Unsplash Photo

    The Bangko Sentral Ng Pilipinas (BSP) kept its overnight reverse repurchase rate unchanged at 6.25% on May 18, pausing its aggressive hiking cycle after raising the rate by a total of 425bps since May 2022 to combat elevated inflation. We note three key points from this decision regarding 1) the inflation outlook, 2) forward guidance on the policy rate, and 3) potential reserve requirement ratio (RRR) reduction.

    First, the BSP recognised that headline inflation is on a decelerating path due to slower increases in food and energy-related items, and it is set to return to the central bank’s 2-4% inflation target band by end-2023. Policymakers lowered their 2023 and 2024 headline inflation forecasts to 5.5% and 2.8%, respectively (from 6.0% and 2.9% in the March meeting). We are also reducing our 2023 inflation forecast to 5.4% from 5.8% (see ‘Philippines: The BSP to move to hawkish pause’ for further inflation discussion). While being more sanguine on their baseline numbers than previously, the BSP’s inflation risk matrix is still skewed to the upside, due to food supply constraints, uncertainty on the impact of El Niño on food prices and electricity rates, and potential adjustments to transportation fees and wages, with core inflation still higher than the headline rate.

    Second, we, therefore, see the BSP’s pause as hawkish. While the BSP has communicated in its statement that it would keep its policy rate unchanged ‘over the near term’ (with BSP Governor Medalla mentioning next two to three meetings), it has left the door open to resume further monetary tightening, should actual inflation deviate higher from its current assessment. We note that there are five meetings remaining in 2023, and at this juncture, we maintain our view for the policy rate to stay steady at 6.25% for the rest of the year to continue anchoring inflation expectations.

    Third, Governor Medalla hinted at the possibility of a RRR cut as soon as the June meeting, potentially by 200bps from 12%. If the RRR is reduced in June, it would come in line with the end-June 2023 expiration of the pandemic-related relief measure pertaining to banks using their loans to micro, small, and medium enterprises (MSMEs) as alternative compliance for reserve requirements. This implies that the net effect could be neutral for monetary policy.


    Chua Han Teng, CFA

    Economist - Asean
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