● Bangko Sentral ng Pilipinas (BSP) kept the overnight reverse repurchase facility at 6.25% at its fourth 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 deems it appropriate to maintain current policy settings to allow the BSP to further assess how inflation and domestic demand have responded to tighter monetary conditions. It added, "however, lingering upside risks to the inflation outlook also warrant continued vigilance against potential second-round effects."

● Slashed the 2023 inflation forecast and see growth moderation

- GDP: BSP expects domestic growth momentum to remain intact in the near term. Nevertheless, BSP sees a moderation in economic activity over the policy horizon, as reflected in the recent demand indicators, mainly due to the impact of previous cumulative rate hikes and the weak global growth prospects. 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 amid potential economic headwinds.

- Inflation: 2023 average inflation forecast revised to 5.4% from 5.5% and expects inflation to return to the target range by year's end. However, BSP revised up 2024 forecast to 2.9% from 2.8%. Overall, BSP sees upside risk to inflation due to the potential impact of the increase in transport fare, minimum wage adjustments, persistent supply constraints of key food items, El Nino weather conditions and higher toll rates on agricultural prices.

- Currency: As of June 22, the Peso appreciated by 0.2% against the USD compared to the end of 2022 despite the hawkish tilt by the US Fed. Similarly, the Rupiah gained (4.1%), while other regional currencies, such as the Ringgit (-5.7%) and Baht (-1.4%), weakened.

● Policy rate outlook maintain at 6.25% for 2023 as an upside risk to inflation remains

- While inflation continues to moderate amid the lag impact of previous cumulative rate hikes, we still expect BSP to keep the policy rate steady at 6.25% for the rest of 2023. This is largely due to the potential second-round effects on inflation, as the average inflation outlook for 2023 is expected to remain elevated, above the central bank’s target range of 2.0% - 4.0%. Being data-dependent, BSP reiterated that it, "remains prepared to resume monetary tightening as necessary, in line with its data-dependent approach to ensuring price and financial stability." However, we see a lower probability that BSP will resume monetary tightening given the expectations of a global growth slowdown brought by the tighter financial conditions in the advanced economies.

- USDPHP year-end forecast (54.4; 2022: 55.7): We retain our forecast as we expect Peso to appreciate slightly against the USD by the end of the year on the back of potential dovish shift by the US Fed amid heightened recessionary risk brought by the impact of restrictive monetary policy measures. Nevertheless, the appreciation is expected to be relatively mild given the greenback's safe-haven status.

Source: Kenanga Research - 23 Jun 2023