Oxford Economics expects the Philippines’ 10-year government bond yield to trend down in 2023-2024, after rising continuously since Q3 2020. Though monetary tightening is set to continue in the near-term, eventual easing will put downward pressures on the yield.
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At the same time, Oxford Economics thinks risk premia will decline, pulling down long-term interest rates and easing pressures on domestic financial conditions. As a result, we expect a brief period of yield curve inversion, with the short-term rate temporarily overshooting the long-term bond yield.
At the shorter end of the yield curve, Oxford Economics expects monetary tightening by the Bangko Sentral ng Pilipinas (BSP) will continue in the near-term amid high inflation, before pausing for the rest of the year. In 2024, Oxford Economics anticipates the BSP will turn to monetary easing to bring the policy rate down to the neutral rate of 5%, which will ease pressures on the long-term yield.
Declining inflation will allow the BSP to cut rates. Oxford Economics expects global energy prices to fall, while imports should help ease domestic food inflation. Demand-pull forces are unlikely to have a material effect, as the reopening boost to domestic demand will fade. Not only does lower inflation give the BSP policy space, it also puts downward pressures on the nominal long-term rates through lower inflation expectations and volatility.
Source: Oxford Economics