MANILA – BMI, a unit of Fitch Solutions, has cautioned the Philippine central bank on the timing of cutting policy rates.
In a commentary released Friday following the announcement of the Monetary Board on Thursday to maintain policy rates, BMI said rate cuts should be considered only when food prices have already stabilized.
Likewise, BMI added that the Bangko Sentral ng Pilipinas (BSP) should only continue with interest rate reductions when major central banks across the world have also eased their monetary policy, which is seen to be happening by the second quarter next year.
“With clear risk to inflation outlook and the external sector under pressure, policymakers will likely keep financial conditions very restrictive for a while longer. This feeds into our expectations for rate cuts to materialize only in Q2 2024,” BMI noted.
BMI’s inflation forecast for the country is at 4 percent by the end of 2023.
However, risks to inflation remain high with the onset of El Niño, which is seen to intensify between the fourth quarter of 2023 and the first quarter of 2024, which could threaten food prices.
The depreciating peso is also seen to be a risk to inflation as the country is a net importer.
The peso has already weakened by 1.9 percent against the US dollar year-to-date.
"Policymakers will be cautious about exacerbating further weakness in the peso, especially given that the US Federal Reserve has not completely closed the door on further tightening--a key risk that we have been highlighting," BMI said.
On Thursday, the Monetary Board kept its benchmark interest rate at 6.25 percent.
The BSP has maintained its policy rates for three months after increasing rates by a cumulative 425 basis points from May 2022 to March 2023. (PNA)