● Bangko Sentral ng Pilipinas (BSP) kept the overnight reverse repurchase facility unchanged at 6.25% at its sixth Monetary Board meeting for 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 deemed it appropriate to maintain its pause amid the emerging upside risks to the inflation outlook” and added, “the BSP stands ready to resume its tightening actions in the face of upside risks and potential second-round effects that could dislodge inflation expectations.”

● Revised up inflation forecast and see upside risk on inflation

- GDP: BSP removed the growth outlook from the statement, indicating that the central bank is shifting its focus towards controlling inflation. Of reference, BSP previously projected GDP growth to settle within the government’s target range of 6.0% to 7.0% for 2023.

- Inflation: BSP latest baseline projection showed a slightly higher inflation, though it expects inflation is likely to revert to the 2.0% - 4.0% target range by 4Q23. Of note, headline inflation increased to 5.33% in August (Jul: 4.66%), while the average year-to-date inflation rate stood at 6.63%, reflecting an elevated inflationary pressure. Consequently, BSP revised its 2023 average inflation forecast to 5.8% from 5.6% in the previous monetary policy meeting. It also revised its average inflation forecast for 2024 to 3.5% from 3.3% but kept the 2025 projection unchanged at 3.4%. Overall, BSP still expects a balance of risk to the inflation outlook tilted to the upside due to the potential impact of further adjustments in transport fares and electricity rates.

- Currency: As of September 20, the peso depreciated by 1.3% against the USD compared to the end of 2022, primarily due to a stronger USD and rising fears of a global economic slowdown led by China’s fragile economic recovery. Nevertheless, the depreciation was relatively lower compared to the ringgit (-6.4%) and baht (-5.9%).

● Policy rate outlook maintained at 6.25% for the remainder of 2023

- We expect BSP to keep the policy rate at 6.25% for the rest of 2023 despite its governor Eli Remolona signalled a hawkish tone during the press conference, as it stated, “a rate hike is on the table for November. How big it would be would depend on the data”. While the upside risk on inflation is largely due to supply shock, we see limited pressure on the demand side due to the impact of the higher interest rate environment and slowing domestic growth, which should support the policy rate to stay at 6.25%.

- USDPHP year-end forecast (54.4; 2022: 55.7): we continue to expect the peso to appreciate slightly against the USD by the end of the year on the anticipation of a potential dovish shift by the US Fed brought by the impact of its continued restrictive monetary policy on domestic demand, alongside poor China’s economic recovery.

Source: Kenanga Research - 22 Sept 2023