• The Monetary Board of Bangko Sentral ng Pilipinas (BSP) in its second Monetary Board meeting for the year retained its Target Reverse Repurchase (RRP) rate at 6.50%. It was within expectations
  
  − The interest rates on overnight deposit and lending facilities were also kept at 6.00% and 7.00%, respectively.
  
  − BSP statement: “The Monetary Board deems it appropriate to maintain the BSP's tight monetary policy settings.” BSP also repeat, “BSP remains ready to adjust monetary policy settings as necessary, in keeping with its primary mandate to safeguard price stability.”

• Upside risk on the inflation outlook persists, while domestic growth trajectory is expected to remain intact
  
  − GDP: BSP expects domestic growth momentum to remain intact over the medium term as reflected by the latest demand indicators though overall activity continues to gradually respond to tighter financial conditions.
  
  − Inflation: Risk-adjusted inflation forecast for 2024 edged up to 4.0% from 3.9% previously, indicating that the inflation outlook is now expected to reach the upper end of the government’s target range of 2.0% - 4.0%. However, BSP keeps its estimate for 2025 unchanged at 3.5%. The upside risks to inflation are mainly attributable to several factors: higher transport charges, elevated food prices, higher electricity rates, and global oil prices. It also added that "potential minimum wage adjustments could also give rise to second-round effects." Though upside risks linger, the inflation outlook seems balanced as BSP stated that “expectations have remained broadly anchored”.
  
  − Currency: As of April 5, most regional currencies depreciated against the US Dollar compared to the end of 2023. The peso fell by 2.1% to 56.59, but this is relatively lower than the depreciation in other regional peers, such as baht (-4.6%), ringgit (-3.3%) and rupiah (-3.1%).

• BSP might maintain the current policy setting for an extended period, depending on shifts in US Fed policy
  
  − We maintain our view that the central bank is expected to keep its policy rate unchanged in the 1H24. This outlookis based on the inflation risk leaning towards the upside and a weaker peso, due to a stronger US dollar, potentially complicating policy easing. However, we still believe there is ample room for BSP to cut interest rates in a bid to boost economic growth, given that the current restrictive monetary policy stance which is at a 16-year would inevitably impact consumer spending, subsequently reducing growth potential. Nevertheless, BSP might wait for a US Fed policy shift due to the peso hitting a five-month low.
  
  − USDPHP year-end forecast (54.4; 2023: 55.4): For now, we maintain our year-end forecast given the uncertainty over the US Fed policy direction. Our current assumption is mainly based on the expectation of a policy shift by the US Fed as we expect rate cuts to be implemented in the 2H24, while China’s gradual economic recovery is expected to lend some support.

Source: Kenanga Research - 9 Apr 2024