THE BANGKO SENTRAL ng Pilipinas (BSP) is expected to maintain its rate-reduction cycle even with the minor increase in November’s inflation, according to analysts.
Nonetheless, factors like the depreciation of the peso may lead the central bank to adopt a more prudent stance regarding additional easing.
“In general, the inflationary pressures were not widespread, and the short-term outlook stays favorable. Hence, we believe the BSP will cut its policy rate by 25 basis points (bps) in its upcoming meeting in December,” stated ANZ Research.
The headline inflation rose to 2.5% on a year-over-year basis in November, up from 2.3% in October, primarily due to increased food prices caused by typhoon damage.
This adjustment brought the average inflation to 3.2% over the 11-month timeframe, comfortably within the 2-4% target range.
Miguel Chanco, Chief Emerging Asia Economist at Pantheon Macroeconomics, indicated that it is “clear” for a third consecutive rate cut later this month.
“Importantly, the outcome was also well within the BSP’s projected range of 2.2% to 3%, suggesting that the bank will almost certainly implement another 25-bp reduction to the target reverse repo rate this month, lowering it to 5.75%,” he noted.
The Monetary Board is scheduled to conduct its final policy-setting meeting for the year on December 19.
The central bank may choose to pause its easing cycle or enact another 25-bp rate cut later this month, as stated earlier by BSP Governor Eli M. Remolona, Jr.
He mentioned that inflationary pressures might lead them to keep rates unchanged, while a reduction is probable if economic growth continues to be sluggish.
Since August, the Monetary Board has executed a cumulative 50 bps in rate cuts, reducing the key rate to 6%.
“The low inflation figures reinforce our expectation of a rate decrease in the December 19 meeting, particularly in light of the disappointing third-quarter 2024 growth,” remarked HSBC economist for ASEAN, Aris D. Dacanay.
Mr. Chanco observed the “unsatisfactory” third-quarter gross domestic product (GDP) performance, which would allow for additional rate cuts.
The Philippine economy expanded by a less-than-expected 5.2% during the July-to-September interval, slower than the 6.4% growth of the second quarter and 6% from a year prior.
This also marked the weakest growth since the 4.3% increase in the second quarter of 2023.
“However, the Board’s rate-cutting phase is far from finished, despite the evident global adjustment of policy rate expectations upward post-US elections,” stated Mr. Chanco.
“The BSP, in response to the latest inflation information, confirmed that it will ‘continue to adopt a measured approach in its easing cycle,’ mirroring the language used in October when rates were last reduced by 25 bps.”
Inflation is anticipated to remain within the 2-4% target range moving forward.
“Overall, inflation should soon stabilize comfortably below the 3% midpoint of the BSP’s target range — barring any shocks — setting the stage for the 100 bps in further easing we foresee next year,” Mr. Chanco concluded.
The BSP anticipates inflation to align with the target range from this year through 2026. It forecasts an average inflation of 3.1% for this year, 3.2% in 2025, and 3.4% in 2026.
However, the central bank cautioned that the balance of risks surrounding the inflation outlook from next year through 2026 has tilted to the upside.
The BSP’s risk-adjusted predictions foresee inflation at 3.3% next year and 3.7% in 2026.
“Simultaneously, the risks to our end-2025 benchmark rate baseline of 4.75% are considerably skewed to the downside, as policy will continue to be excessively tight in real terms, even after an additional 125 bp in cuts,” stated Mr. Chanco.
For 2025, ANZ Research projects a cumulative 75 bps in rate cuts to “help stimulate domestic demand.”
Mr. Remolona has indicated the potential for up to 100 bps in rate reductions next year.
PESO WEAKNESS
Meanwhile, Mr. Dacanay mentioned that the recent peso depreciation could present a challenge to the BSP’s easing cycle.
“The only upward risk to monetary policy lies within the currency. The USD-PHP (US dollar-Philippine peso) fluctuated between P58.5 and P59 throughout November. It was even mere moments away from surpassing its historical highs on November 26.”
The peso reached an all-time low of P59 against the dollar on two occasions during the month — on November 21 and November 26.
“However, things have improved since then. The PHP has now appreciated to P58.23 against the USD, and, as per HSBC FX, ongoing support is anticipated due to the seasonal influx of remittances,” he added.
Following its drop to the record low last month, the peso has fortified. The local currency strengthened to P57.735 per dollar on Friday, rising by 14.5 centavos from its P57.88 close on Thursday.
Mr. Dacanay also stated that the sentiment of the US Federal Reserve “will be pivotal.”
“However, it will be essential to observe the Fed’s tone in the upcoming two weeks. Any shift towards a more hawkish stance may induce volatility in the currency and lead the BSP to pause its easing cycle,” he noted.
Reuters reported that US rate futures indicated about a 90% likelihood the Fed will lower interest rates by 25 basis points at its December 17-18 policy meeting, according to LSEG calculations which previously indicated only a 72% likelihood.
The Fed has cut rates by 75 bps since September when it initiated its easing cycle. — Luisa Maria Jacinta C. Jocson
