ab15 February 2024Global Research and Evidence LabAPAC Economic PerspectivesBSP: Turning a little less hawkishBSP left rates on hold, but flags less upside risks to inflationThe BSP left the target reverse repurchase (RRP) rate unchanged at 6.5% p.a. at today's policy meeting, in line with consensus and UBS expectations. It lowered its 2024 baseline and risk-adjusted inflation forecasts by 0.1ppt and 0.5ppt, respectively, to 3.6% and 3.9%. Both are now within the central bank's 3±1% inflation target. The reduction in the risk-adjusted forecast reflects BSP's assessment of less acute upside risks, even though its baseline outlook was "broadly unchanged", as per the monetary policy statement (MPS). The MPS also dropped the reference to the"need to keep monetary policy settings sufficiently tight", merely noting that it would be "appropriate to keep the monetary policy settings unchanged in the near term". The tone is slightly less hawkish, in our view. Inflation is now within target, even though rice prices remain elevated Headline inflation has fallen within the central bank's 3±1% inflation target for two consecutive months (Jan/Dec: 2.8%/3.9%). Meanwhile, core inflation fell another 0.3ppt to 3.4% y/y (+0.5% m/m) in January. Food inflation has eased rapidly, from a high of 10% y/y in Sep'23, to just 3.3% y/y in Jan'24. This was mainly due to base effects (recall the onion price surge last Jan and the typhoon-triggered spike in vegetable prices in Q4'22). Sequentially, food prices rose 0.8% m/m in January, mainly led by rice (+2.3% m/m). This was offset by lower vegetable prices (-2.0% m/m), oils and fats (-0.2% m/m), and sugar and confectionery (-0.5% m/m). BSP still expects inflation to breach 4% in Q2, as do weAt the media conference, BSP said it expects inflation to rise above 4% in April-July 2024 (due to base effects), before subsiding to around 3% in Q4. Our forecasts for inflation are generally similar to the BSP's. However, factoring in the weaker-than-expected January print, we shave down our full-year forecast for inflation to 3.5% in this note (Prev: 3.6%). We expect inflation to average 3.0% in Q1, 4.0%, in Q2, 3.6% in Q3, and 3.4% in Q4. In our forecasts, inflation hovers slightly over 4% in May-July 2024. We expect rice prices to ease gradually after the rice harvest which comes on market in March (see our previous report here). Downside risks to inflation might materialize if the government ramps up imports (rice imports in December increased by 29% y/y to 387,210 metric tons), or if the rice harvest is ample. The fact that core inflation remains well contained, and that inflationary pressures are not broad-based, supports our view that this supply-driven inflation will eventually normalize. Scope for rate cuts from around mid-year, RRR cut also possibleAt the media conference, BSP officials reiterated ...
