• The Monetary Board of Bangko Sentral ng Pilipinas (BSP) slashed its Target Reverse Repurchase (RRP) rate by 25 bps to 6.25% during its fifth Monetary Board meeting for the year, defying expectations
  
  − The interest rates on overnight deposit and lending facilities were also reduced to 5.75% and 6.75%, respectively.
  
  − BSP statement: “With inflation on a target- consistent path, the current macroeconomic outlook supports a calibrated shift to a less restrictive monetary policy stance.” This indicates that the central bank has now moved towards supporting the domestic economy while reiterating that it will “remain mindful of lingering upside risks to prices”.

• Stable price pressures and the need to support growth call for a less restrictive monetary policy
  
  − GDP: BSP expects economic activity to remain supported by firm domestic demand backed by public investment, easing price pressures and robust employment conditions. Growth is still targeted at 6.0% - 7.0%. However, actual growth may align closer to the lower-end target of this range after 2Q24’s 6.3% increase (1Q24: 5.8%), bringing 1H24 growth to 6.0% (2H23: 5.8%). Additionally, the prospect of a higher growth in the 2H24 is challenging given the global growth uncertainty.
  
  − Inflation: BSP projects inflation to trend lower, within the government target of 2.0% - 4.0%, citing "supported by well-anchored inflation expectations over the policy horizon". It anticipates the balance of risks to the inflation in 2024 and 2025 to lean toward the downside. However, BSP has adjusted its forecasts, raising the 2024 inflation projection to 3.3% from 3.1%, and lowering the forecast for 2025 to 2.9% from 3.1%.
  
  − Currency: As of August 14, the peso remains weak, having depreciated by 2.8% to 56.9 against the USD since the end of last year. This decline is slightly steeper than that of its regional peers, such as the rupiah (-0.9%), and baht (-0.3%), while only ringgit appreciated by 3.8%.

• We expect another two rate cuts by end of the year, as BSP shifts its focus on bolstering the economy
  
  − Given the surprise rate cuts ahead of the US Fed FOMC meeting, we expect BSP to consider further monetaryeasing in the final quarter, particularly if the Fed adopt a more dovish stance. While this could weaken the peso and increase import cost, especially given Philippines’s heavy reliance on food imports, the central bank appears to have shifted to a pro-growth policy to support domestic economic growth amid global uncertainties.
  
  − USDPHP year-end forecast (56.0; 2023: 55.4): We maintain our year-end forecast following the recent slight revision. While a rate cut ahead of the US Fed could temporarily pressure the local note, we expect that a dovish stance from the Fed in the coming months will support our year-end target.

Source: Kenanga Research - 16 Aug 2024