Philippines to cut rates by 75bps from 4Q2023 as inflation moderates

Special focus: We now expect the Philippines central bank to lower its policy rate from 4Q2023, bringing it to 5.50% in 1H2024 from 6.25% currently. A key driver is our expectation for headline inflation to moderate to 3.9%yoy by end-2023. We continue to see PHP underperforming Asian FX (including the high yielders), given still wide current account deficit and relatively expensive FX valuations. We forecast a gradual decline in USDPHP to 55.5 in 3m, and 54.4 in 12m.

FX views: Most emerging Asian currencies weakened against the dollar amid the background of a 1.0% rise in dollar index. The MYR led losses with a 1.4% decline, followed by THB (-0.9%) and CNY (-0.7%). In contrast, KRW outperformed regional peers by strengthening 0.2% against the dollar on risk-on sentiment.

Week in review: Sluggish exports markets were seen in Taiwan and South Korea amid softening global demand and weakening demand for technology products. Industrial production for Taiwan and Singapore both surprised market to the downside last month. Singapore’s headline CPI inflation edged up to 5.7%yoy in April, while Malaysia’s headline CPI inflation slid to 3.3%yoy in April.

Central bank monitor: The Bank of Korea and Bank Indonesia kept their key rates on hold. The BOK Governor struck a slightly more hawkish tone, and left the door open for an additional rate hike. Meanwhile BI avoided sending a clear signal on rate cuts, while emphasising the need to support the rupiah.

Week ahead: For the coming week, the focus will be on US payrolls, ISM Manufacturing and Eurozone’s May CPI in the G10 space. In China, May PMI numbers will be released, while India will also release 1Q GDP numbers. South Korea will release a host of economic data, including 1Q GDP and May CPI.

WE NOW EXPECT THE PHILIPPINES CENTRAL BANK TO CUT RATES BY 75BPS STARTING 4Q2023, BRINGING THE REVERSE REPO RATE TO 5.5% FROM 6.25% CURRENTLY

Sources: CEIC, MUFG GMR