Philippines: Hold decision more likely than 25bp cut at MB meeting on Thursday
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
We think that a hold decision is more likely than a 25bp rate cut at the next meeting of BSP's Monetary Board (MB) on Aug 15. In June, the MB kept the key rate unchanged at 6.50%. In line with expectations, this was the MB's sixth consecutive hold decision.
BSP Governor Eli Remolona said on Tuesday that there is more space to maintain tight monetary policy settings. He also said that the central bank intends to launch monetary policy easing when conditions are right. The governor noted that they do not want to keep the key interest rate high for an unnecessarily long time. Therefore, they will have room to ease the policy rate as soon as they feel that inflation is on the way to the target range of 2-4%.
Remolona made these comments at a Senate hearing. On a related note, Finance Secretary Ralph Recto, who is also a member of BSP's Monetary Board (MB), reiterated during the hearing that he expects up to 50bps in rate cuts by end-2024. There will be two more MB meetings in 2024 - on Oct 17 and Dec 19.
Meanwhile, the results of a Reuters poll announced on Tuesday showed that economists are divided, as 13 of 24 projected that the BSP will keep the policy interest rate unchanged at 6.50%, whereas the remaining 11 forecast a 25bp cut. The BusinessWorld surveyed 16 analysts last week. The poll showed that nine expect a 25bp cut and seven anticipate a hold decision.
Inflation
CPI inflation increased to 4.4% y/y in July from 3.7% y/y in June. The inflation target range is 2.0%-4.0%. The CPI rose by 3.7% y/y in Jan-Jul. Annual core inflation decelerated to 2.9% in July from 3.1% in June. The seasonally adjusted CPI rose by 0.6% m/m in July, after being flat m/m in June.
The BSP commented that the July CPI data are consistent with its forecasts that inflation will temporarily increase above target in July, but could follow a general downtrend beginning in August.
Economic growth
The GDP increased by 6.3% y/y in Q2, speeding up from revised 5.8% y/y in Q1. In seasonally adjusted terms, the GDP increased by 0.5% q/q in Q2, after rising by 1.1% y/y in Q1. The GDP rose by 6.0% y/y in H1. The government targets economic growth in the range of 6-7% for 2024.
The most significant weakness of the latest GDP data concerns private consumption. Household final consumption expenditure rose by 4.6% y/y in Q2, with the growth rate unchanged from Q1. In seasonally adjusted terms, household final consumption expenditure fell by 0.1% q/q in Q2, after dropping by 0.2% q/q in Q1.
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In July, the IMF and the ADB announced their latest macroeconomic forecasts for the Philippines. It turned out that their GDP growth forecasts are identical for both 2024 and 2025. They expect economic growth of 6.0% this year and 6.2% next year.
LFS, lending growth
The unemployment rate was 3.1% in June, down from 4.1% in May and 4.5% in Jun 2023, according to the results of the latest Labour Force Survey (LFS). The June reading matches the record low registered in Dec 2023 and is the lowest unemployment rate in nearly two decades.
Outstanding loans of universal and commercial banks, net of reverse repurchase (RRP) placements with the BSP, rose by 10.1% y/y to PHP 12.09tn at end-June, with the y/y growth rate unchanged from end-May. Annual loan growth has been in the double digits for the second month in a row. It had been accelerating over the period Dec 2023 - May 2024. This has taken place against the background of the tight monetary policy stance of the BSP.
Exchange rate
The peso is trading at USD/PHP 57.04 as of the time of writing, which compares with USD/PHP 58.720 on Jun 27, the date of the latest MB meeting. The exchange rate was USD/PHP 55.388 on Dec 29.
The recent strengthening of the Philippine currency is one of the factors supporting a policy rate cut, along with the mixed GDP data, in our view.