As expected, Bangko Sentral ng Pilipinas (BSP) left its overnight reverse repurchase (RRP) rate unchanged at 6.25% for the second straight meeting. It cited that cooling inflation readings and indications of moderating economic activity over the policy horizon allowed the central bank to continue taking a pause in its monetary policy tightening to further assess the lagged effects of past interest rate hikes since May 2022. The decision is also consistent with the guidance from policymakers since last month (22 May).  

BSP made a slight tweak in its inflation projections for 2023 (at 5.4% vs 5.5% projected in May, UOB est: 5.3%) and 2024 (at 2.9% vs 2.8% previously, UOB est: 2.5%) as well as introduced a 3.2% inflation forecast for 2025 in today’s meeting. These latest baseline projections continue to suggest a gradual return of inflation to its 2.0%-4.0% medium-term target band amid lingering upside risks from supply chains, domestic policy changes, and weather conditions.

Given that inflation expectations remain in line with the central bank’s assessment and the currency (PHP) stability is currently preserved, we think BSP will continue its rate pause campaign for the rest of the year. At the same time, it will also exercise caution in its response to the Fed’s latest hawkish remarks as BSP is still mindful of the potential impact of narrowing interest-rate differential on PHP. BSP also reiterated in its statement that the central bank “remains prepared to resume monetary tightening as necessary…” and ongoing price pressures continue to warrant close monitoring. Hence, the incoming release of inflation data on 5 Jul and 4 Aug, real GDP outturn for 2Q23 (10 Aug), as well as the outcome of FOMC meeting on 25-26 Jul are important factors, which will influence the next BSP rate decision on 17 Aug.