The BSP held benchmark reverse repurchase (RRP) rates steady at 6.25%, and made no changes to the overnight deposit (5.75%) and lending (6.75%) rates. BSP Governor Eli Remolona said that the Monetary Board deemed it appropriate to maintain its pause amid the emerging upside risks to the inflation outlook. <\/p>\n\n\n\n
Remolona added that the BSP stands ready to hike rates anew if there are second-round effects that could dislodge inflation expectations, and warns that a rate hike could be on the table in November depending on how bad inflation data could get.<\/p>\n\n\n\n
Upon taking supply-side risks on key commodities into consideration, the BSP raised its inflation forecasts for full-year 2023 and 2024 while keeping 2025 outlook unchanged. However, Remolona remains optimistic that inflation could return to the BSP\u2019s target range of 2-4% by November in the absence of further supply shocks.<\/p>\n\n\n\n
The sharp slowdown in economic growth in the 2nd quarter (Q2) has put pressure on the BSP to advance its timeline for a rate cut to support the economy. However, the uptick in headline inflation due to unexpected supply shocks, as well as a steadfastly hawkish Fed prevents them from doing so. The BSP may be forced to hike in November if headline inflation continues to track higher, or if the Fed opts for a rate hike to counter their own inflation problems. <\/p>\n\n\n\n
However, we note that this hypothetical November rate hike would be done for optics, if not for any other reason. It simply will not be a good look for the BSP to hold or cut if inflation heats up further above 6% or if it allows the interest rate differential with the US to fall to 50 bps. <\/p>\n\n\n\n
A November hike would be unwarranted in our opinion, as we noted previously that the recent uptick in inflation is supply-side in nature and must be countered with more appropriate measures. The true conundrum lies in the risk of a Fed rate hike, as a 50 bps differential would be depreciative for the peso and could trigger a negative feedback loop that would make the inflation scenario even worse. <\/p>\n\n\n\n
While the Fed has plenty of room to hike rates with the American economy defying expectations, the BSP has no such headroom as the Philippine economy cools. In other words, the BSP is running out of bullets and the burden of fighting inflation and stimulating the economy now falls on the government and the private sector.<\/p>\n\n\n\n