HSBC Still Looking For Q3 BSP Cuts

HSBC: "In line with consensus, the BSP decided to stay on the safer side of things and kept its policy rate unchanged at 6.50%. Furthermore, we think the BSP has maintained a cautious tone.

The sentiment of caution is in anticipation of what's ahead. Since base will turn unfavourable by this month, we expect headline inflation to eventually breach the BSP's 2-4% target band until August this year (Philippine CPI, 5 April 2024). Once these base effects wear off, inflation should return to within the BSP's target band, giving the BSP the opportunity to finally loosen the monetary reins. Our base case scenario is for the BSP to cut rates by 25bp to 6.25% in 3Q 2024, and then by 50bp to 5.75% in 4Q 2024.

Nonetheless, risks to the policy rate outlook are tilted to the upside both due to inflation and the Fed. Apart from elevated rice prices, global oil prices have returned to USD90 a barrel. This comes at the worst time when unfavourable base effects are at their most potent. The US labour market has also largely surprised to the upside (Continued resilience, 5 April 2024), stoking concerns on the timing of the Fed's first rate cut. Although this is not HSBC Economics' baseline scenario (we expect the Fed's first rate cut in 2Q 2024), we think a delay in the Fed's easing cycle could also delay the BSP's first rate cut. And with growth in the Philippines very resilient, the BSP, in our view, can afford to delay its first rate cut if it needs to support the Peso or to cool inflation further. In other words, the BSP has room to hold its policy rate high for longer.

The good news is that core CPI inflation has continued to cool, leading to the real policy rate differential between the BSP and the Fed to widen to more comfortable levels. This may help mitigate the volatility in the Peso, limiting the upside risk of the BSP tightening its policy rate further."