The Bangko Sentral ng Pilipinas on Thursday kept the benchmark interest rate steady at 6.5 percent amid easing inflation and strong domestic demand.
It said the policy-making Monetary Board decided to keep the overnight borrowing rate unchanged at 6.50 percent and the overnight deposit and lending facilities at 6.0 percent and 7.0 percent, respectively.
“The balance of risks to the inflation outlook still leans significantly toward the upside. Key upside risks are associated with potential pressures emanating from higher transport charges, increased electricity rates and higher oil prices. Meanwhile, the impact of a relatively weak global recovery as well as government measures to mitigate the effects of El Niño weather conditions could reduce the central forecast,” the BSP said in a statement.
It said the country’s medium-term growth prospects remained firm, with strong demand expected in the fourth quarter due to sustained consumer spending and improved labor market conditions.
The BSP said it would continue to monitor how firms and households are responding to tighter monetary policy conditions alongside evolving domestic and external economic conditions.
Global forecasting and analytics company Oxford Economics said the BSP decided to maintain the policy rate at 6.5 percent, given the sustained disinflationary trend over the past two months.
“Although supply-side issues remain, the BSP chose to stay put for the time being and assess the inflationary trend more carefully,” it said.
Oxford Economics said it expects the BSP to hold interest rate adjustments until the second quarter of 2024 when it would likely start cutting rates.
“We expect inflation to hover within the bank’s 2 percent to 4 percent target by then. Subdued growth momentum should then take the center stage,” it said.
It said inflation, a renewed cause for concern at the BSP, has been on a downward trend for the past two months, settling at 4.1 percent in November.
It said while the BSP maintained its position that the risks to inflation are skewed to the upside, it lowered its risk-adjusted inflation forecast for 2023 slightly, and indicated that inflation expectations remain anchored for the time being.
The Philippines peso has also been gaining against the US dollar recently, which means there is now less risk of imported inflation feeding through to domestic prices.
“On the growth front, Q3 GDP proved more resilient than expected, which gives the BSP comfort in maintaining a hawkish stance by keeping rates elevated,” it said.
“We think the BSP’s next move will likely be a cut rather than a hike, happening in Q2 2024. We expect monthly inflation to settle within the bank’s target by January, partly due to favorable base effects. As with the BSP, we think there will be a modest pickup in annual inflation rate in Q2, but unlike the bank we don’t expect it will breach the target upper band, and hence our expectation for a rate cut in Q2,” it said.