• In an unsscheduled meeting, Bangko Sentral ng Pilipinas (BSP) raised the Target Reverse Repurchase (RRP) rate by 25 basis points (bps) to 6.50%
  
  − The interest rates on overnight deposit and lending facilities were also raised to 6.00% and 7.00%, respectively.
  
  − BSP statement: “The Monetary Board recognised the need for this urgent monetary action to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations”. It also vows to keep higher rates for longer, “The Monetary Board deems it necessary to keep monetary policy setting tighter for longer until inflationary expectations are better anchored and a sustained downward trend in inflation becomes evident.”

• BSP maintains growth outlook but revised up its inflation forecast for 2024 as balance of risk has tilted to the upside
  
  − GDP: BSP stated, “the country’s medium-term growth prospects remain largely intact,” indicating its confidence that the economy will remain resilient in the medium term. Nevertheless, we see a near-term growth outlook to be impacted by a higher interest rate environment. This is backed by BSP’s observation that “recent domestic indicators point to dissipating pent-up demand in the near term”.
  
  − Inflation: BSP flagged a hawkish tone on price pressures, with the latest baseline projection showing an elevated inflation path over the policy horizon. Though it does not revise the 2023 inflation target (2023F: 5.8%), its latest risk-adjusted forecast for 2024 stands at 4.7% from 4.3% (3.5% in the previous Monetary Board meeting). This is above the government’s target range of 2.0% to 4.0%. Overall, BSP still expects a balance of risk to the inflation outlook tilted to the upside significantly due to the potential impact of higher transport charges, electricity rates, international oil prices, and minimum wage adjustments in areas outside the National Capital Region.
  
  − Currency: As of October 25, the peso depreciated by 2.1% against the USD compared to the end of 2022, primarily due to a stronger USD amid a hawkish US Fed. This is also partly due to the escalation in the Middle East tensions. Nevertheless, the depreciation was relatively lower than the ringgit (-8.6%) and baht (-4.7%).

• Another 25 bps hike is expected amid hawkish bias by BSP and upside risk on inflation expectations
  
  − The urgency of monetary policy tightening reflects the commitment by the BSP to ensure inflation is put under control amid the impact of supply shock from El Nino and higher oil prices following an escalation in geopolitical tensions in the Middle East. Given the hawkish tone in its statement, which is skewed towards price stability, the rate hike cycle may not be the last one. Therefore, we expect BSP to raise the policy rate by another 25 bps to 6.75% by the end of the year, mainly due to the potential of upside risk to inflation next year.
  
  − USDPHP year-end forecast (54.4; 2022: 55.7): we maintain our forecast for the peso to appreciate slightly against the USD by the end of the year. This is mainly in anticipation of a potential dovish shift by the US Fed once highfrequency indicators point to a slowdown amid the impact of its restrictive monetary policy. The local note is also expected to be supported by China’s gradual economic recovery.

Source: Kenanga Research - 27 Oct 2023