• The Monetary Board of Bangko Sentral ng Pilipinas (BSP) retained its Target Reverse Repurchase (RRP) rate at 6.50% during its fourth Monetary Board meeting for the year. This 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 hold monetary policy settings steady at this time.” BSP also hinted at a rate cut in the 2H24 as it stated, “an improvement in the inflation outlook would allow more scope to consider a less restrictive monetary policy stance”. Nevertheless, its statement appears cautious citing “uncertainty in the external environment calls for some caution against potential spillovers, including those in the financial markets”.

• Easing price pressures and sustained growth outlook, but weaker local note amid broad USD strength
  
  − GDP: BSP expects domestic growth to remain in line with the medium-term trends on the back of favourable labour market conditions and strong net exports. Its growth target recently was revised to 6.0% - 7.0% from 6.5% - 7.5%.
  
  − Inflation: Risk-adjusted inflation forecasts for 2024 and 2025 have eased to 3.1% from 3.8% and 3.7%, respectively, indicating that the inflation outlook is now expected to reach the mid-point of the target range of 2.0% - 4.0% thanks to the impact of lower import tariffs on rice under Executive Order 62.
  
  − Currency: As of June 26, most regional currencies depreciated against the US Dollar compared to the end of 2023. The peso fell by 6.3% to 58.9, but the rate of depreciation was slightly below the rupiah (-6.6%), and higher than the baht (-5.7%), and ringgit (-2.6%).

• BSP is expected to maintain the current policy setting in the near term, contingent on any policy shift from the US Fed
  
  − The central bank has maintained its policy rate unchanged in the 1H24 which was in line with house expectation. While there is room for BSP to lean towards a monetary policy easing in the 2H24 as soon as in August’s meeting, we expect BSP to take a cautious stance, given the uncertainty of the US Fed policy direction. A weaker peso will eventually make imports expensive, particularly given the Philippines’s heavy reliance on food imports. In 2023, the Philippines was the world’s largest rice importer. Despite a dovish remark by the Governor, we revise our policy rate outlook from three cuts to only two 25 bps reduction in October and December respectively, as we anticipate a delay in the domestic policy rate cuts. Despite higher rates, the domestic economy is expected to remain on the trajectory, buoyed by government spending and resilient domestic demand.
  
  − USDPHP year-end forecast (56.0; 2023: 55.4): We revised year-end forecast from 54.4 but continue to expect the Fed will be turned dovish in the 2H24 to support our target from current level.

Source: Kenanga Research - 28 Jun 2024