MB with more dovish members may spur rate cut

MB with more dovish members may spur rate cut

By Keisha B. Ta-asan, Reporter

THE POLICY-MAKING ARM of the Bangko Sentral ng Pilipinas (BSP) likely has more dovish members than hawkish ones, which could tip the central bank to cut key rates this year after the US Federal Reserve starts its own policy easing, according to an economist.

With BSP’s Monetary Board (MB) members now complete, it would be good practice to run through them and assess their policy leaning, Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, said in a note on Thursday.

“Counting hawks and doves at the Federal Open Market Committee is a regular practice for most analysts attempting to gauge the timing and direction of the next Fed move,” he said. “With the BSP’s monetary board cast complete, perhaps we should try to carry out this exercise as we begin the year and predict the BSP’s next move and timing.”

Last week, former Finance Secretary Benjamin E. Diokno assumed the last remaining private sector seat on the Monetary Board after his successor Ralph G. Recto took over the Department of Finance.

As Finance chief, Mr. Recto automatically became a member of the Monetary Board, which is headed by BSP Governor Eli M. Remolona, Jr.

The Monetary Board exercises the powers and functions of the central bank, including monetary policy and supervision of the financial system. Aside from the central bank chief, it has five full-time members from the private sector and a member from the Cabinet.

Mr. Mapa said the BSP governor is more of a hawk, having repeatedly signaled that there is a need for borrowing costs to be “sufficiently tight” this year.

“We expect him to drive the discussion with his preference for ‘higher for longer’ now that the BSP continues to operate utilizing the risk-adjusted inflation forecast as opposed to their actual baseline forecast,” he said. 

BSP kept its policy rate steady at a 16-year high of 6.5% at its December meeting. This was after the Monetary Board tightened rates by 450 basis points (bps) from May 2022 to October 2023 to help bring down inflation. 

At the December meeting, the Monetary Board lowered its risk-adjusted inflation forecast for 2023 to 6% from 6.1% in November and to 4.2% from 4.4% for 2024. It kept its inflation forecast at 3.4% for 2025.

The BSP started using a “risk-adjusted inflation forecast” rather than the “baseline” when it delivered a 25-bp off-cycle rate hike in October. The risk-adjusted inflation forecast incorporates more risks to the inflation outlook. 

Mr. Mapa said another possible hawk on the Monetary Board is Romeo L. Bernardo, who became a member in September.

“Mr. Bernardo has not spoken recently on policy, but we did get a good dose of his analysis at his think tank prior to his MB appointment,” he said. “Thus, Mr. Bernardo may be leaning hawkish, possibly supporting the higher for longer narrative of the governor.”

Before his appointment as a member of the board, Mr. Bernardo was a Philippine analyst at GlobalSource Partners.  In a note in August, Mr. Bernardo cited risks to inflation and the still-elevated core inflation.

Data from the local statistics agency showed headline inflation slowing to 3.9% in December from 4.1% in November and 8.1% a year ago. This was the first time inflation returned to within the 2-4% target in nearly two years.    

Still, full-year inflation stood at a 14-year high of 6% in 2023. This was above 5.8% in 2022 and marked the second straight year that average inflation breached the BSP’s 2-4% target.

Meanwhile, Mr. Diokno seems to be more of a dove given his most recent comment, which indicates that the BSP could cut borrowing costs by as much as 100 bps this year, Mr. Mapa said.

He also said Mr. Recto and former National Treasurer Rosalia V. de Leon might be dovish members as well due to their fiscal background.

“The secretary of Finance is expected to lean dovish given his need to fund the republic while also managing the current fiscal debt and deficit levels,” he said. “Although he may not call for rate cuts immediately, we could see him leaning dovish and rule out additional tightening.”

“Ms. De Leon is a potential dove at the Monetary Board given her longstanding career at the Bureau of the Treasury,” Mr. Mapa said. “She has not necessarily spoken out about her policy leaning, but her fiscal background and the current level of the national debt could suggest she leans dovish this year.”

On the other hand, the ING economist is unsure where Bruce J. Tolentino and Anita Linda R. Aquino align themselves on the board.

“MB member Aquino’s work in policy reform is well covered given her extensive background in the private sector,” he said. “[Ms.] Aquino, however, has yet to speak out on her views on policy so this makes her a potential swing vote for the hawks or the doves.”

“Meanwhile, MB member Tolentino recently underscored the role of supply-side measures in fighting off price pressures, which could mean he leans dovish, although it remains unclear if he would opt to support a more dovish leaning in 2024, making him another wild card.”

Based on his analysis, Mr. Mapa said the Monetary Board has one hawk, one dove, one hawkish member and two dovish, as well as two wild cards.

“This arithmetic points to the doves (and hawks) only needing one swing vote in the Monetary Board room to tip the balance,” he said. Anything could happen in the coming months regarding monetary policy, he added.

“Once the BSP reverts to using its baseline inflation forecast for its policy decision-making, we do see the doves possibly making a case for a rate cut shortly after the Fed finally conducts its much-awaited pivot.”

Last month, BSP kept its average inflation baseline forecasts at 6% for 2023, 3.7% for 2024, and 3.2% for 2025. The 2024 and 2025 inflation views are both within the 2-4% target.    

The US Federal Reserve hiked borrowing costs by 525 bps from March 2022 to July 2023, bringing its benchmark overnight rate to 5.25% to 5.5%.

On the other hand, a flare-up in global crude oil prices and extensive crop damage from El Niño could delay BSP’s pivot to the latter part of the year, Mr. Mapa said.

The BSP will hold its first policy review of the year on Feb. 15.