MANILA (UPDATE 2) - The Bangko Sentral ng Pilipinas kept interest rates steady in line with analysts’ expectations, but also said that it is now “less hawkish” and may begin cutting rates as early as August.

BSP Governor Eli Remolona on Thursday said the Monetary Board again decided to keep the bench target reverse repurchase rate at 6.5 percent amid continuing inflation risks.

“The risks to the inflation outlook continue to lean toward the upside. Potential price pressures are linked mainly to higher transport charges, food prices, electricity rates, and global oil prices,” Remolona said during the central bank’s press briefing.  

After easing to 2.8 percent at the start of the year, inflation quickened to 3.4 percent in February, 3.7 percent in March and 3.8 percent in April amid high food prices, particularly rice.

However, the BSP also lowered its risk-adjusted inflation forecast for 2024 to 3.8 percent from 4.0 percent in the previous meeting.

Remolona also said that the inflation rate in April was “was better than expected” as it included positive base effects, referring to the 6.6 percent inflation rate in April 2023, which was slower than the 7.6 percent clip in March that same year.

“So it's actually better than it looks,” Remolona said.

BSP Deputy Governor Francisco Dakila Jr. also emphasized that the April inflation figure was mainly due to just one commodity.

“And actually, if you were to look at the factors behind the April inflation number, more than half of that is attributable to just one commodity, which is rice. So it's not really a broad-based inflation number,” Dakila said.

Remolona said the BSP could cut rates by the third or fourth quarter of the year.

“Possibly by August of this year,” Remolona said.

The BSP also lowered its baseline inflation forecast for 2024 to 3.5 percent from an earlier 3.8 percent.

For 2025 however, the baseline forecast was raised to 3.3 percent from 3.2 percent. The risk-adjusted forecast for 2025 was also raised to 3.7 percent from 3.5 percent previously.

“As the Governor has said in his earlier response to the question from the press, we're a little bit less hawkish now. So he's saying either by the third or the fourth quarter, there's a possibility of an adjustment, a relaxation in the monetary policy stance. So I would say that if inflation continues to moderate and revert back to the target, then it's going to be a win-win situation for all,” Dakila said.

Market analyst and Senior Managing Director of Investment and Capital Corporation of the Philippines Manny Ocampo welcomed Remolona’s stance on a rate cut.

While the governor mentioned a period when it might happen, Ocampo expects the BSP to wait on the US Federal Reserve to cut its rates first.

“Movements in the US Fed will precede any rate cut, if any, by the BSP. They’re sensitive on interest rates and how it affects everyone, but they’re also equally sensitive on peso-dollar rates. If they preempt a rate cut with the US interest rates remaining where they are, it might have a negative impact on peso-dollar rate,” Ocampo said.

High interest rates were cited as a factor in the lackluster investment by businesses and the slowdown in household consumption in the first quarter of the year.

The Philippine economy grew 5.7 percent in the first quarter, which was one of the fastest growth rates in the region, but still below the 6 to 7 percent target of economic managers.