THE Bangko Sentral ng Pilipinas (BSP) is anticipated to persist in its easing trajectory, however, secondary repercussions from an imminent global trade conflict could obstruct its policy direction, analysts indicated.
“The BSP remains in a loosening stance from a fundamentally tight monetary policy; it has yet to reverse its considerable tightening from prior years,” stated GlobalSource Partners Country Analyst and former BSP Deputy Governor Diwa C. Guinigundo.
“Nevertheless, the BSP might find itself navigating its easing strategy confronted with upward risks,” he added.
The central bank unexpectedly maintained interest rates last Thursday, keeping the target reverse repurchase rate (RRP) steady at 5.75%.
This came after the Monetary Board executed three consecutive rate reductions since it initiated easing in August, totaling a decrease of 75 basis points (bps) by the conclusion of 2024.
BSP Governor Eli M. Remolona, Jr. noted that the choice to maintain rates was influenced by global uncertainties stemming from the US’ tariff regulations. He expressed greater concern regarding the indirect impacts of these tariff actions, since the direct effects on the Philippines are expected to be modest.
Markets have been disturbed by concerns of a global trade war triggered by US President Donald J. Trump’s proposal to impose reciprocal tariffs on any nation that taxes US imports.
Mr. Guinigundo remarked that these tariff modifications could have an immediate effect on price levels and domestic inflation.
“Trade uncertainties tend to elevate the risk premium and may also introduce inflationary pressures. The direct impact of tariffs and trade uncertainties along with fluctuating fuel prices could be restrained at this point, but the indirect influences on wages, transport fares, and domestic pricing might be considerable,” he stated.
Mr. Guinigundo indicated that these secondary repercussions might “accumulate into inflation” in the forthcoming months.
According to a report from Capital Economics, the indirect effects of reciprocal tariffs “could potentially be larger” than a blanket tariff.
“A reciprocal tariff might diminish the appeal for friendshoring in those emerging markets that maintain high tariff barriers, as multinational corporations would likely consider alternative, less vulnerable locations for their supply chain arrangements — particularly Vietnam and other regions in Southeast Asia as well as advanced economies,” they noted.
ANZ Research posited that emerging Asian economies would be subjected to a “direct line of fire” should reciprocal tariffs be enforced.
“Current trade tensions might escalate significantly if the US government enacts reciprocal tariffs on Asian markets,” stated ANZ.
“In contrast to 2018, when these economies only faced secondary repercussions from the US-China trade war, they would now experience a direct impact.”
The United States is the primary destination for Philippine exports, while China typically represents the largest source of imports for the Philippines.
Citi Economist for the Philippines Nalin Chutchotitham mentioned that these trade regulations could exert pressure on the peso.
“Looking forward, the postponed Fed funds rate reduction and uncertainties regarding US trade policies pose risks of peso depreciation, which might affect inflation via imports of food and energy, in addition to converted income remittances from overseas workers,” she remarked.
MEASURED EASING
In spite of the pause last week, analysts suggested that the BSP is likely to proceed with easing rates, but at a cautious and calculated pace.
“We believe the decision indicates that the BSP is seeking to temper the pace of the easing cycle (after three successive cuts), based on the governor’s definition of ‘measured’ and lacking a robust justification for the hold decision,” remarked Nomura Global Markets Research analysts Euben Paracuelles and Nabila Amani.
Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. expressed that he perceives limited potential for monetary easing this year.
“A narrowing interest rate differential might cause capital outflows, while the nation’s current account deficit amplifies its susceptibility to external shocks… Maintaining steady interest rates may be necessary to alleviate these risks. We still project the policy rate to close the year at 5.25%,” he noted.
For the remainder of the year, Mr. Guinigundo expects two additional rate reductions.
“Depending on forthcoming data regarding inflation and inflation expectations, two more rate cuts could be anticipated,” he mentioned.
“Easing monetary policy might yield marginal benefits for growth. However, tightening could ensure more favorable outcomes in managing inflation without significant collateral damage to growth.”
Simultaneously, Nomura forecasts the Monetary Board will lower borrowing costs by 75 bps through three rate cuts.
“We continue to predict an additional 75 bps of policy rate reductions in this phase, bringing the RRP rate down to 5%, which we still consider to be the BSP’s neutral rate, given its forward guidance suggesting its stance remains tight and that it intends to lessen this tightness.”
Both Nomura and Citi anticipate the Monetary Board to enact rate cuts in April, August, and December by 25 bps each.
“While we believe the BSP could manage a total reduction of 75 bps this year, considering a high real policy rate and favorable interest rate differential with the Fed, Governor Remolona’s more cautious forward guidance of a total of 50-bp cuts this year implies that a third cut still depends on various factors beyond domestic demand and inflation,” Ms. Chutchotitham elaborated.
Similarly, Mr. Neri indicated that the BSP could recommence rate cuts in June.
“Further policy easing remains plausible later this year, particularly if the outlook for domestic inflation remains positive. There is a possibility that the BSP could cut in June if the gross domestic product (GDP) growth in May continues to lag,” he asserted.
Nevertheless, he cautioned that uncertainties from the Federal Reserve’s guidance and changing global dynamics could render rate cuts in the latter half of the year more difficult.
Mr. Remolona has stated that the BSP is still engaged in an easing cycle, noting the possibility of rate cuts up to 50 bps this year.
RRR CUT IN APRIL
Meanwhile, Nomura anticipates the BSP to further decrease the reserve requirement ratio (RRR) in April.
“We believe April is a feasible timeframe, as the demand for liquidity may rise ahead of the midterm elections in May,” they mentioned.
“We have also argued that this sequencing (i.e., RRR cuts first followed by additional RRP rate cuts) is logical. From the BSP’s perspective, these reductions align with its long-term objective of lowering the RRR to single-digit levels while also enhancing the transmission of its policy rate cuts later in the year.”
Mr. Remolona has indicated that an RRR reduction is still under consideration this year, potentially before the Monetary Board’s next policy review on April 3.
He has indicated a potential 200-bp decrease, which would adjust the RRR for major banks to 5% from the current 7%.
“Such a move could potentially bolster economic activity while exerting minimal impact on the exchange rate in comparison to the policy rate,” Ms. Chutchotitham added. — Luisa Maria Jacinta C. Jocson
