Surprising February inflation allows BSP to break loose from Fed dance
The lower-than-expected inflation in February could give the Bangko Sentral ng Pilipinas (BSP) enough space to cut interest rates regardless of the slow pace of easing of the US Federal Reserve, analysts said.
In a commentary, Aris Dacanay, economist at HSBC Global Research, said the benign price growth could help the economy absorb the pass-through effect of a weak peso.
Inflation, as measured by the consumer price index (CPI), sharply slowed to 2.1 percent in February from 2.9 percent in the preceding month, data showed.
“We think February CPI supports, not just a continuation of the BSP’s easing cycle next quarter, but a policy rate cut regardless of the Fed,” Dacanay wrote.
“With inflation finding itself within the lower-end range of the BSP’s target band, there is room for the economy to absorb any foreign exchange-induced inflation if the policy rate differential between the BSP and the Fed were to narrow (i.e. the BSP were to cut even if the Fed does not),” he added.
Data showed the 2.1-percent headline CPI in February was the softest print in five months. The deceleration was so sharp that it fell below both market consensus and the BSP’s own forecast.
Overall, the lower-than-expected inflation last month further put price gains firmly within the 2-percent to 4-percent target range of the central bank, which is in the middle of a “calibrated” easing cycle.
“Given low inflation, we believe the BSP has room to rebalance its risks from FX (foreign exchange) stability and inflation to supporting growth,” Dacanay continued.
Not in lockstep
Still, the timing of the next interest rate cut remains the talk of the market.
At its first policy meeting for this year last month, the central bank decided to keep the benchmark rate, which banks typically use as a guide when pricing loans, untouched at 5.75 percent.
The move defied market expectations, with Governor Eli Remolona Jr. admitting it was not an easy decision for monetary authorities, who were wary of global trade developments and the uncertainty they bring.
At a press briefing on Thursday, Nalin Chutchotitham, economist at Citibank, said the BSP does not have to match the moves of the Fed.
“I think that the Fed is something that central banks watch out for anyway, but we don’t have to be [in] lockstep not only for the Philippines but also for our neighbors,” said Chutchotitham, who expects three quarter-point cuts to the local policy rate this year.
“We do have to maybe watch out for the timing as well as when there’s too much volatility in the FX market. I think the BSP takes that into account,” she added.
