Philippines: BSP (May 2024) - Turning less hawkish

Key Points

• The Philippines central bank kept its policy rate on hold in its May 2024 meeting, but importantly for markets, seems a touch more dovish in its tone.
• First, the BSP cut its risk-adjusted inflation forecasts for 2024 to 3.8% from 4.0% previously. Nonetheless, this was accompanied by an increase in its 2025 risk-adjusted CPI forecast to 3.7% from 3.5%. The details are not out yet, but we suspect the change could be driven by assumptions on the timing of electricity tariff increases.
• Second, the BSP said that they may cut rates in August, opening the door to possible rate cuts starting in 2H2024, even as the central bank highlighted that inflation is likely to rise above its inflation target from May to July due to base effects.
• Third, the central bank also highlighted that indicators point to GDP growth moderation, even as it said that the Philippines’ growth path is largely intact and still strong compared to the region.
• Overall, it’s unclear how much of this change in tone is driven by the lower-than-expected US CPI yesterday, but certainly the tone was somewhat more dovish than we had anticipated. We were of the view that the BSP would remain hawkish to guard against PHP volatility and as such would only cut rates from 1Q2025 (see PHP: Too Fast and Furious?). 

• The key for the PHP moving forward is not just the timing of BSP rate cuts, but also the pace at which it happens. A less hawkish BSP is not as supportive for the PHP, but our base case assumption is that the BSP rate cut cycle when it starts will be slow and measured.
• Net-net, we remain neutral on PHP from an FX perspective. A less hawkish BSP has to be balanced with other drivers of the currency including a more manageable current account deficit in 2024 (~2% of GDP), rise in FDI approvals, together with possible increase in equity inflows (if growth expectations does eventually improve).
• We are currently forecasting USDPHP at 57.00 for 4Q2024 and 56.50 for 1Q2025.