• The Monetary Board of Bangko Sentral ng Pilipinas (BSP) retained its Target Reverse Repurchase (RRP) rate at 6.50%. It was within market expectations although we anticipated a final hike based on the inflationary trend.
  
  − The interest rates on overnight deposit and lending facilities were also kept at 6.00% and 7.00%, respectively.
  
  − BSP statement: “The Monetary Board continues to see the need to keep monetary policy settings sufficiently tight to allow inflation expectations to settle more firmly within the target range.” The statement’s slightly dovish tone is evident as it omits mention of further tightening, replacing it with “BSP remains ready to adjust monetary policy settings as necessary, in line with its mandate to ensure price stability.”

• Upside risk on inflation persisted, but BSP revised the inflation forecast slightly for 2024
  
  − GDP: BSP reiterated its optimistic view on the domestic growth outlook, as it stated that “medium-term growth prospects remain firm, with strong demand expected in the fourth quarter due to sustained consumer spending and improved labour market conditions.”
  
  − Inflation: BSP is still cautious about inflation, underlining that “balance of risks to the inflation outlook still leans significantly towards the upside”. This is partly due to several factors: higher transport charges, increased electricity rates, and higher oil prices. However, it sees weak global recovery alongside government measures to mitigate the effects of El Nino, which could reduce the inflation forecast. Consequently, its risk-adjusted inflation forecast for 2024 now revised down to 4.2% from 4.4%, indicating that next year’s inflation outlook is closer to the government’s target range of 2.0% to 4.0%. Meanwhile, the estimate for 2025 remained at 3.4%, its target range.
  
  − Currency: As of December 14, the peso fell slightly (-0.3%) to 55.9 against the USD compared to the end of 2022. This is relatively lower than the depreciation in other regional peers, such as the ringgit (-6.9%) and baht (-3.4%).

• May have reached the end of its tightening cycle as inflation has started to moderate
  
  − Given the moderation in the latest inflation rate, albeit above its target range of 4.0% to 5.0%, we expect the central bank to keep its policy rate steady in early 2024. This is primarily because the BSP aims to confirm a sustained growth moderation in inflation, adhering to its primary mandate of price stability. However, there is potential an earlier rate cut, considering that the current tighter monetary policy stance is likely to weigh on the growth outlook.
  
  − USDPHP year-end forecast (54.4; 2022: 55.7): our forecast remains unchanged as we believe the peso to appreciate slightly against the USD by the end of the year following the surprise dovish signal by the US Fed on policy rate direction. The local note is also expected to be supported by China’s gradual economic recovery and tracking the regional appreciation.

Source: Kenanga Research - 15 Dec 2023