Philippines: Central Bank pauses monetary policy tightening cycle in May
At its 18 May meeting, the Bangko Sentral ng Pilipinas (BSP) left the overnight reverse repurchase facility rate unchanged at 6.25%. Concurrently, the rates on the overnight deposit and lending facilities—which establish the floor and the ceiling of the interest rate corridor—remained at 5.75% and 6.75%, respectively. May’s decision had been widely anticipated by market analysts.
What the BSP described as a “prudent pause” came on the back of moderating projections for inflation this year, softening inflation expectations and signs of cooling domestic demand. The Bank saw 2023’s headline rate averaging 5.5%, down from the previous 6.0% target, while demand indicators in the first quarter of this year suggest monetary policy tightening has begun to stifle economic activity somewhat. Lastly, broader government policies aimed at alleviating food supply pressures further encouraged the Bank to pause in anticipation of further moderation in price pressures.
In its communiqué, the Bank indicated it would pause rate hikes “while remaining ready to respond to emerging threats to inflation.” Nevertheless, the BSP saw rates remaining at current levels over the near term in order to curb ongoing price pressures. In an interview with Bloomberg, Central Bank Governor Felipe Medalla said that the Bank would consider loosening its policy stance once the U.S. Fed begins cutting rates, though he added that he did not anticipate this in 2023.
The Consensus is for the key policy rate to end the year around current levels. The next monetary policy meeting will take place on 22 June.
Nomura economists Euben Paracuelles and Rangga Cpita commented on the outlook:
“We continue to see today’s decision as marking the end of BSP’s hiking cycle and expect the policy rate to remain unchanged at 6.25% through the rest of 2023 and early 2024. While BSP mentioned in the policy statement that it can resume monetary tightening, we think this is unlikely, given headline inflation will likely remain on a downtrend […]. Beyond this, we still believe BSP will only start cutting its policy rate in March 2024, when our US economics team also expects the Fed to start easing.”