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Over the weekend, Finance Secretary Ben Giorno said the BSP is likely pausing in the next meeting

and that monetary authorities have done enough on inflation

and these rate adjustments aren't the only game in town.

Our first guest this morning doesn't think so.

In fact, he sees the BSP tightening until inflation trends lower.

Steve Cochrane of Budis Analytics joins us now live.

Hi, Steve. Thanks so much for joining us.

Good morning.

Good morning.

So what do you need to see to be able to say that inflation is sustainably, convincingly trending lower?

Well, I think there's two indicators we look at there.

They're related to one another.

One, of course, is the top-line inflation number,

which did come down a little bit in February, 8.6% over the year.

In February, down from 8.7% in January.

That was good news in that it was the first time in quite some time

that inflation actually didn't continue to accelerate month by month.

So some indication that the pace of inflation may begin to ease.

But that difference of 8.6, 8.7, it's a pretty small difference.

Moreover, core inflation, which strips out some food items and some fuel items,

continues to go up.

Core inflation rose to 7.8% from 7.4% in January.

So I think it's clear that inflation hasn't been whipped.

And so that's why at least I do think there may be one more rate hike coming.

It depends on some intermediate data coming in before the next BSP meeting.

But we'll see where it goes.

The inflation is still high,

and the Philippines does have the highest inflation rate

amongst all the major economies within Southeast Asia.

But Steve, you did mention high inflation will be a fixture throughout the year.

What are the sticky drivers that you're seeing?

What's causing this inflation, specifically the core inflation, to keep going up?

Yeah, well, one of it is that there is fairly strong domestic demand for goods and services.

There's still this period of rebound from last year's very weak economy with COVID shutdowns.

And a lot of domestic demand.

And as throughout much of Southeast Asia, that is driving somewhat higher prices.

The rebound in travel and tourism with the opening up of borders and travel

is generating some inflation, although it's a little bit separate from what the ordinary consumer faces,

but high transport costs and high food costs and high lodging costs.

So that adds to the top line numbers, even if it's not quite felt by the ordinary person in the street.

So this, along with some potential increase in energy prices,

could mean that inflation is a little bit sticky.

We heard a moment ago that energy prices, crude oil prices, were up by about $3 a barrel just in the last day or so.

And I do expect that actually as the Chinese economy rebounds, particularly in the second half of this year,

that may put a little bit of pressure on demand for energy,

keeping crude oil prices elevated for a while this year

before they begin to head back more towards a long-term equilibrium price next year.

So Steve, you mentioned China, because when you zoom out, not just look at the Philippines, but Asia in general,

you've got China yesterday releasing their industrial profits for the first two months of the year.

It actually contracted 23% year on year, deeper than the 4% contraction from last year.

Demand is softening and cost remains high.

Then you've got Germany, other side of the world, seeing business climate indicator go up.

93.3 in March, highest since Feb 2022.

And then Turkey's business morale is at a nine-month high.

Malaysia's producer price index falling for the first time in two years.

When you look at all of these numbers, do they seem like they're screaming a recession, at least for Asia?

What are you seeing?

No, I don't think they're screaming a recession.

Actually, I think when you look at Asia and you look at ASEAN in particular, you're looking at some of the stronger global economies.

And again, particularly because there still is a fair amount of pent-up domestic demand in a lot of the economies in Asia.

We're looking at global growth of something close to maybe 2% this year.

But Asia growth might be something closer to 4%.

That includes China.

And Philippines, even stronger.

I suspect that the economy in China will be an important driver of the broader Asian economy.

I think the turnaround will be slow, and we saw that in the profits number that came out yesterday.

But we are seeing gains in retail sales, in industrial production, in fixed asset investment.

So the number is a little bit mixed, but I think on balance positive for China.

And I think the China rebound from its zero COVID policy is here to stay.

And the second half will look a lot better than the first half.

And that should help a turnaround in export demand, which is so important for Southeast Asia and for the Philippines as well.

So what about the West? What are you seeing for the U.S. and for Europe?

I mean, how bad are things going to get this year?

Everyone's talking about whether it's a hard landing, a soft landing, a no landing.

And the new meme is a rolling recession, where industries take turns going into a recession, not happening all at once.

What are you expecting to see from that side of the world?

Well, frankly, I think that the risk of recession has risen a month or two ago, at least before the banking crisis in the U.S.

We might have said that the risk of recession in the U.S. was maybe about 45 percent when we look at, say, the next 12 months out.

That's certainly risen to about 50-50, and it's going to be very, very difficult to determine how this plays out,

partly because of the uncertainty in terms of monetary policy, where interest rates will go over the next six months,

and certainly how business confidence plays out over the next six months or so.

The banking crisis has knocked business confidence a little bit, particularly because bank lending has constricted a bit.

We see that in the U.S. again in the senior loan officer's survey that's conducted very frequently,

and there's been quite a bit of tightening of lending standards, given all the uncertainty in the banking industry and such.

That may not last, given particularly now the seemingly successful resolution of Silicon Valley Bank, but there will be some uncertainty to come.

So it's going to be a very tight call, 50-50, whether we hit a recession and a lot of uncertainty ahead.

So given the difficulty of calling whether a recession is coming for the U.S. and Europe, for the West generally,

should central banks have stopped raising already? I mean, when you look at the Fed, is it time to step on the brakes?

Well, certainly as the Fed reaches its terminal rate, and that terminal rate is the final rate that the Fed ends up at in this tightening cycle,

and we do expect that at the May meeting there will be another 25 basis point hike perhaps, but that may be it.

And so this is a time for central banks to begin thinking about also purely watching their own inflation rates rather than kind of looking over their shoulders at what the Fed is doing.

That won't be quite so necessary anymore.

There have been a couple of central banks in Asia that have already gone on at least a brief pause.

If we look at Indonesia, Malaysia, Korea, they've all taken a break from raising rates.

They have promised that this is the end, but at least they've taken a break.

So there is a little bit of breathing room coming up for central banks to be able to slow the process,

and I think indeed that's what BSP has done at their last meeting.

Instead of raising 50 basis points or 75, they raised only 25 basis points, perhaps the beginning of the end for BSP as well.

Beginning of the end.

Do you think though, final question, that investors who are watching us now, who are watching where the macroeconomy goes, where the markets are going, should investors start to be repricing at this point?

Well, the way I look at it from the point of view of looking at the broad economic picture is that probably the fourth quarter of last year, the earlier months of this year,

were probably the weakest period of this sort of, if we want to call it a mini cycle, not exactly a business cycle.

We're not falling into recession, but this mini cycle of a slowdown that we are beginning to work past that low point,

and I think we will see the economies begin to accelerate as we get into the second quarter, particularly Q3 and Q4.

And so I think the outlook looks good given all of the constraints of high interest rates, the uncertain business climate, still the uncertainty in terms of energy prices.

I think the second half of this year looks to be an improvement in the macroeconomic situation.

And will that trickle down to an improvement in corporate earnings as well?

Well, it certainly should. Costs may still be high. It depends on where inflation ends up, particularly in the Philippines, and depends on where interest rates go.

I think it's going to be a long haul before inflation truly comes back, say, to the BSP's target of 2% to 4%.

It might be end of 2024, early 2025 before we get into that range.

So there will be interest rate considerations to consider for some time.

But I think with the demand still fairly strong, the economy hopefully accelerating, conditions should look pretty good.

All right. On that positive note, thank you so much, Steve. Always a pleasure to speak with you. Have a great week ahead.

Thank you.