Central Bank maintains rates in June, ready to start cutting

At its meeting on 27 June, the Bangko Sentral Pilipinas (BSP) decided to maintain the Target Reverse Repurchase Rate at 6.50% for the sixth straight meeting, with the interest rates on the overnight deposit and lending facilities also remaining at 6.00% and 7.00%, respectively. The decision was in line with market expectations.

June’s hold was driven by inflation moving closer to the midpoint of the 2.0–4.0% target range, with the Bank’s risk-adjusted inflation forecast easing to 3.1% for both 2024 and 2025. Additionally, the balance of risks to the inflation outlook has shifted to the downside, influenced by lower import tariffs on rice, though this has been countered by higher prices for other food items, transport and electricity.

The Central Bank indicated that a sustained improvement in the inflation outlook “would allow more scope to consider a less restrictive monetary policy stance”. Governor Remolona subsequently commented that the likelihood of an August rate cut had risen and that a 25 basis point reduction in both Q3 and Q4 could be on the table. Virtually all our panelists expect rates to end the year below current levels, with the majority expecting the BSP to deliver its first cuts in Q4—broadly in line with the Fed’s pivot—though a lower-than-expected inflation rate in June could prompt an earlier rate cut. Uncertainty in global financial markets and geopolitical conflict pose upside risks. The next meeting is scheduled for 15 August.

ING analyst Robert Carnell commented on the outlook: “We still feel that it is going to be difficult for BSP to front-run rate policy with the Fed unless it is prepared to let the peso weaken significantly, and we prefer a 4Q rate cut to what was proposed today. That said, it is clear which direction the BSP's intentions are pointing so we are prepared to be disappointed.” Goldman Sachs analysts Rina Jio and Danny Suwanapruti see some scope for earlier rate cuts: “We continue to expect BSP to start cutting policy rates in Q4 2024. However, we see significant downside risk to our inflation forecast for 2024, especially given the lower electricity price announced recently. We see risk of an earlier cut from the BSP if inflation comes in significantly softer in the next two months and dollar strength moderating.”

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