Key Points
- The Philippines central bank kept its policy rate on hold in its April 2024 meeting, but tilted marginally more hawkish in its tone.
- The BSP raised its risk-adjusted inflation forecasts for 2024 to 4%, from 3.9% in the last meeting in Feb 2024, but kept its 2025 forecast at 3.5% unchanged.
- Higher oil prices, transport and utility rates were cited as reasons for the upside tilt in inflation forecasts, while the central bank also highlighted other key factors biasing inflation to the upside such as rice prices and possible minimum wage adjustments.
- Governor Remolona said that the BSP’s policy remains tight, continues to restrain demand, and should be sufficient to bring inflation rates down. The central bank governor also said that “data has to be really bad” for another rate hike to be considered, while the BSP could consider cutting its key rate in 3Q24 if there’s good news on inflation, and somewhat weak growth.
- Overall, we characterise our view on PHP as neutral, and continue to forecast BSP to cut rates only gradually by 50bps in 2H2024 (see Asia FX Outlook 2Q2024 – Light at the end of the tunnel, slide 51) . There are of course risk factors to consider such as the recent rise in global oil prices, coupled with uncertainty around whether the Fed will cut rates later this year.
- From a domestic perspective, inflation still looks better managed this year, notwithstanding upside risks. In addition, tourism continues to improve further, the labour market is resilient, while the surge in FDI and investment approvals that we have already seen bodes well for investment recovery in 2024.
- From an external stability perspective, the current account deficit should average around 2% of GDP in 2024 (~US$10bn), and down from the 3% rates seen over the past 2 years. Steady growth in Business Process Outsourcing revenues and remittances, coupled with further tourism improvement should help to offset the goods deficit, albeit with some uncertainty around the impact of oil prices.
- We forecast USDPHP at 56.0 for 2Q2024, and 55.0 for 1Q2025, and expect BSP to start to cut rates from 3Q2024, bringing the key policy rate to 6% from 6.5% currently. The risks tilt towards the rate cut cycle starting later.
