● Bangko Sentral ng Pilipinas (BSP) kept the  overnight reverse repurchase facility at 6.25%  at its third Monetary Board meeting this year, in line with expectations

− The interest rates on overnight deposit and  lending facilities were also kept at 5.75%  and 6.75%, respectively.

− BSP statement: The Monetary Board  decided that a pause in monetary policy  tightening was appropriate based on the  new information and assessment of the  impact of previous cumulative rate hikes,  with the latest baseline projections reflecting a gradual return of inflation to the target  band of 2.0% - 4.0% over the policy horizon.

● BSP slashed the inflation forecast slightly  lower, but the balance of risk to inflation  outlook remains tilted towards the upside

− GDP: BSP cited that demand indicators  have pointed to a potential moderation  following the impact of cumulative rate hikes, despite a relatively robust but moderating growth recorded in 1Q23  (6.6%; 4Q22: 7.1%). Of reference, BSP previously projected growth to settle within the government's target range  of 6.0% to 7.0% for 2023 before slowing in 2024.

− Inflation: BSP revised its 2023 average inflation forecast lower to 5.5% from 6.0% previously and to moderate  further to 2.8% in 2024. It also added that "inflation expectations for 2024 and 2025 are steady and within the  target range", but it flagged that the balance of risk to the inflation outlook remains largely tilted towards the upside  due to "persistent constraints in the supply of key food items, the potential impact of El Nino on food prices and  utility rates, as well as the effects of possible additional adjustments in transportation fares and wages."

− Currency: As of May 17, the Peso depreciated by 0.8% against the USD compared to the end of 2022. This is a  slight depreciation compared to other regional currencies, such as the Ringgit (-2.2%), except the Baht (+0.8%), which strengthened on the back of tourism recovery.

● Policy rate may stay at 6.25% for 2023, with easing policy expected in 2024 as inflation cools down

− We reckon BSP may be done with its aggressive rate hikes, given that inflationary pressure is moderating due to the impact of a previous 425 bps accumulative rate hike since May 2022 to combat inflation. Nevertheless, there  is room for further rate tightening in the 2H23 as BSP stated, "the BSP stands ready to resume monetary tightening  as necessitated by emerging data, consistent with its primary mandate to promote price and financial stability." This also would be mainly susceptible to the impact of El Nino, which is likely to affect agricultural production and  overall food prices.

− USDPHP year-end forecast (54.4; 2022: 55.7): The Peso may appreciate slightly against the USD by the end of  the year as we expect easing monetary policy by the US Fed amid heightened recessionary risk brought by  restrictive monetary policy measures among advanced economies. Nevertheless, the appreciation is expected to  be relatively mild given the greenback's safe-haven status.

Source: Kenanga Research - 19 May 2023