BSP policy rate to stay untouched at 6.25%, analysts say

Market analysts agree that the Bangko Sentral ng Pilipinas (BSP) will keep its benchmark interest rate unchanged at a 16-year-high of 6.25 percent for the third consecutive policy meeting on Aug. 17, but diverge on whether tightening is done or rate cuts are coming.

Goldman Sachs said inflation in the Philippines had eased faster than expected this year and remains on track to return within the upper end—or 4 percent—of the BSP’s target range.

The monthly readout has been on a downtrend for the sixth straight month, settling at 4.7 percent in July from 8.7 percent in January.

Considering that—and the 4.3-percent, “meaningfully below expectations” growth rate of gross domestic product (GDP) in the second quarter—Goldman Sachs expects monetary authorities to make no change in the policy rate this month and as far ahead as the rest of this year.

“We also expect the significantly softer GDP print will likely convince the BSP to maintain its policy rate [this] week despite ongoing upside risks from food inflation,” according to Citi group.

ING Bank also sees a likely extended pause on policy tightening, but observes that persistent upside risks to the inflation outlook could give the BSP a reason to stay hawkish.

“We expect the BSP to keep rates untouched but signal a strong willingness to tighten further should upside risks to the inflation outlook materialise,” the Netherlands-based groups said.

BofA Securities agrees with a continued pause in August, but notes that the US Federal Reserve is still anticipated to raise the US federal funds rate in September at a time when spread between BSP and Fed rates is at its lowest.

With the US policy rate at 5.25 percent to 5.5 percent, this spread is currently at 0.75 percentage point (ppt) to one ppt —or 75 basis points (bps) to 100 bps.

“We believe the BSP will still hike by 25 bp at its September 21 meeting, a day after the Fed rate decision, to reach a terminal rate of 6.5 percent,” BofA said.

Pantheon Macroeconomics also believes the BSP’s pause will not be for long, although for the opposite reason.

“Overall, the latest data support our base case for the BSP to start cutting rates in the fourth quarter, by 50 bp, with inflation poised to return to the bank’s target range in October,” the United Kingdom-based group said. INQ

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