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Interest rate cuts will likely start in June at the earliest, Moody's Analytics said, with monetary authorities continuing to pause during their first three policy meetings for the year due to volatile inflation, according to a report by Manila Times.
"The economy will fare better this year, especially in the second half," the Moody's research unit said in a note published last Friday following the release of the Philippines' 2023 growth results.
"Fading inflation will give the Bangko Sentral ng Pilipinas (BSP) confidence to lower borrowing costs," it added.
The BSP's benchmark rate currently stands at 6.5 percent, the highest since 2007, following 450 basis points (bps) of hikes beginning May 2022 as inflation started surging.
Consumer price growth peaked at a 14-year high of 8.7 percent in January last year but then mostly slowed for the rest of 2023. It returned to the 2.0- to 4.0-percent target in December at 3.9 percent but still averaged above-target at 6.0 percent for the entire year.
The rate is expected to have slowed further in January — official data is to be released today, February 6 — but could again top 4.0 percent in the second quarter due to the impact of the El Niño weather pattern on food prices.
The BSP's policymaking Monetary Board, which will meet next Thursday, February 15, is expected to keep key interest rates on hold for a third straight meeting. Its next meetings will be on April 4 and May 16.
If Moody's Analytics' outlook materializes, a rate cut will be announced during the following meeting on June 27.
"Volatile inflation prints in the first half of the year will persuade BSP to stay on hold, leaving us to expect its first rate cut to be in June at the earliest," it said.
"Until then, household budgets will be under pressure."
Lower interest rates are expected to boost private consumption and investments while improvements in the external climate will also bolster trade.
In particular, "an expected upturn in demand for semiconductors and electronics will brighten prospects in the second half," Moody's Analytics said.
BSP Governor Eli Remolona Jr. has said that rate cuts would happen this year but likely not during the first semester give continued inflation risks.
Other analysts have said that rate cuts will only likely start after the US Federal Reserve begins easing, now expected to start after its April 29 to May 1 meeting after officials last week dashed hopes of a cut as early as March.
In last Friday's note, Moody's Analytics also noted that Philippine economic growth had exceeded its expectations and also that of the market.
Gross domestic product expanded by 5.6 percent in 2023, below the government's 6.0- to 7.0-percent target. It was, however, better than Moody's Analytics' 4.9 percent and the market's 5.2-percent estimates.
Consumer spending and private investment — the latter said to be surprising despite high borrowing costs — were said to have driven growth, particularly in the fourth quarter.
Government spending, on the other hand, fell and merchandise exports tumbled as demand for semiconductors plunged.