Philippines Maintains Key Rate Amid Diminishing Price Risks

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The Philippine central bank opted to keep its key interest rate unchanged for the third consecutive meeting, demonstrating a cautious stance despite signs of receding consumer price risks.

Bangko Sentral ng Pilipinas (BSP) retained the target rate at 6.50%, aligning with the consensus of all 20 economists surveyed by Bloomberg. This decision maintains borrowing costs at nearly a 17-year high, following a series of 450 basis-point hikes since May 2022 aimed at restoring inflation within the central bank’s 2%-4% target range.

“The risks to the inflation outlook have receded but remain tilted toward the upside,” the BSP stated in a released statement on Thursday. The board, convening on Wednesday, concluded that it was “appropriate to keep policy settings unchanged in the near term.”

Following the announcement, the peso sustained its upward trend, gaining 0.2% to 55.98 against the dollar. Prolonged higher rates may provide support for the currency, which has depreciated by 1% this year.

Although the moderation of inflation to a three-year low of 2.8% in January has fueled speculations of an imminent rate cut, the BSP refrained from offering guidance on the timing of such a move. Policymakers emphasized the importance of remaining vigilant against inflationary pressures stemming from elevated food prices due to El Nino, as well as increased transportation and electricity costs.

Governor Eli Remolona previously indicated the possibility of a rate cut “within the year” but suggested it was unlikely to occur in the first half.

Potential constraints from El Nino on agricultural output growth, coupled with possible oil price hikes, pose challenges to overall price stability in a country heavily reliant on rice imports and almost entirely dependent on imported fuel.

Furthermore, the BSP views a potential deal with Vietnam for rice imports as positive, as it revised its risk-adjusted inflation outlook for 2024 from 4.2% to 3.9%.

Acknowledging the likelihood of a slowdown in activity in the Philippines, the current fastest-growing economy in Southeast Asia, the BSP affirmed its readiness to adjust policy settings as necessary. Despite the Philippine economy’s expansion of 5.6% in 2023, which fell short of the government’s 6%-7% target, it maintained its position as the region’s fastest-growing economy.