DBS Bank Raises Philippines' 2024 Inflation Forecast, Prompting Potential BSP Rate Cut Delay

DBS Bank Ltd. of Singapore has revised its 2024 inflation forecast for the Philippines to 3.7% year-on-year, up from the previous forecast of 3.3%. The elevated inflation projection is attributed to expected base effects, higher food prices, and other inflationary pressures such as increased transport fares, electricity tariffs, global oil prices, and a legislated minimum wage hike.

The higher inflation outlook could prompt the Bangko Sentral ng Pilipinas (BSP) to keep interest rates higher for longer, potentially delaying rate cuts until the fourth quarter of 2024. The central bank has signaled it may postpone rate cuts this year if risks to inflation persist, as inflation is expected to exceed the 2-4% target range in the first half of 2024.

Despite picking up to 3.7% in March from 2.4% in February, inflation in the Philippines has been within the BSP's target range, averaging 3.3% from January to March 2024. However, the BSP is likely to maintain a defensive stance due to the delayed rate cut cycle from the US Federal Reserve and volatility in the foreign exchange market, which could further postpone rate cuts until the August meeting or later in 2024.

Why this matters: The potential delay in rate cuts by the BSP has implications for the Philippine economy and borrowers. Higher interest rates for an extended period could impact economic growth and increase borrowing costs for businesses and individuals.

The stronger US dollar, driven by the prospect of higher-for-longer interest rates and geopolitical tensions, has led to a broad-based weakening of Asian and emerging market currencies, including the Philippine peso. The BSP has not intervened significantly in the forex market this time, as the peso's depreciation is in line with other currencies. The direction of the US dollar will depend on US interest rates and developments in the Middle East conflict between Israel and Iran.

At its April meeting, the BSP's Monetary Board kept its key rate unchanged at a near 17-year high of 6.5%, following a cumulative 450 basis points increase from May 2022 to October 2023. DBS cited domestic and global risks, including a delayed start to the US rate cut cycle and resulting peso volatility, as factors that will keep the central bank from front-loading policy easing.

Key Takeaways

• DBS Bank raises 2024 inflation forecast for Philippines to 3.7% from 3.3%.
• Higher inflation may prompt BSP to keep interest rates higher for longer, delaying rate cuts.
• Inflation in Philippines has been within BSP's target range, averaging 3.3% in Q1 2024.
• Delayed US rate cut cycle and peso volatility may postpone BSP rate cuts until Q4 2024.
• Higher interest rates for longer could impact economic growth and increase borrowing costs.