Key Points

• The Philippines central bank kept its policy rate on hold in its September meeting but turned more hawkish in its tone.
• Among other things, the BSP said that it is considering a rate hike for November, and the extent of the rate hike depends on the presence of further supply side shocks and potential second-round effects to inflation.
• The BSP also provided more forceful forward guidance to the market, saying that a rate cut is off the table in 2023, and the key rate in 1H2024 may be at the same level as in late 2023, indicating a rate pause at least until June next year.
• We raise our USDPHP forecast to 57.3 in 3months and 57.5 in 12 months (from 56.7 and 55.2 previously), implying gradual depreciation of PHP against the US Dollar, together with some underperformance against Asian currencies.
• Our forecast change reflects a stronger pickup in oil prices than we assumed, while the US Dollar and US rates have also been higher than our forecasts.
• Domestically, the pickup in food prices adds further to a worsening growth vs inflation trade-off for the BSP as evident in the latest monetary policy decision, and also comes at a time when growth has already slowed down.
• We now see a shallower and more delayed BSP rate cut cycle than our previous forecast. We continue to see BSP keeping rates on hold at 6.25%, but see the BSP cutting rates by 50bps only from 2H2024 (from 75bps of cuts previously). This partly reflects our higher 2023 and 2024 inflation forecast.

• While we continue to note upside risks on global oil and rice prices, we see some areas of support for PHP, which is reflected in our forecast for gradual weakness in the FX vs US Dollar.
• First, BSP has likely been more aggressive in intervening in the FX market, drawing a bit of a line in the sand at the 57 level for USDPHP. The BSP’s hawkish guidance and tone will also provide some support at the margin for PHP.
• Second, domestic demand and growth moderation in the Philippines should imply some narrowing in the current account deficit, although the absolute levels of the current account deficit remains quite high at around 3.4% of GDP.
• Third, while FDI flows into the Philippines have slowed thus far, FDI should improve more meaningfully in 2024 with the rise in FDI approvals seen so far.
• Fourth, we are still expecting inflation to trend lower assuming no further supply shocks, which should continue to boost real interest rates in the Philippines.
• The biggest risks to our PHP forecasts come from oil, rice, and the Dollar. We assume that oil prices moderate into 2024 as Saudi Arabia tapers its production cuts. We also expect the Fed to cut rates next year and the Dollar to weaken gradually. Suffice to say, there are significant elements of uncertainty in all three of these factors.