By Luisa Maria Jacinta C. Jocson, Correspondent
THE BANGKO SENTRAL ng Pilipinas (BSP) is anticipated to carry on with its rate-reducing cycle during its final policy assessment for the year on Thursday, analysts forecast.
A BusinessWorld survey carried out last week indicated that 13 out of 16 analysts project the Monetary Board to lower the target reverse repurchase (RRP) rate by 25 basis points (bps) during its assembly on Dec. 19.
If this occurs, it would decrease the benchmark rate to 5.75% from the present 6%.
This would also signify the third consecutive meeting where the central bank will lower rates since it initiated its easing process in August with a 25-bp reduction. It further decreased borrowing expenses by another 25 bps in October.
Conversely, one analyst anticipates the central bank to decrease by 50 bps, while two analysts perceive the BSP keeping policy rates stable on Thursday.
“We now project the BSP to cut the RRP rate by 25 bps at their Dec. 19 policy gathering,” Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. stated.
“Although a pause (or skip) remains feasible, recent economic data and external occurrences have converged in favor of monetary easing,” he further mentioned.
Analysts ascribed the anticipated further rate cut to diminishing inflation and disappointing third-quarter gross domestic product (GDP) data.
“My expectation is for the BSP to reduce by 25 bps to 5.75% next week. Considerations for this choice include GDP growth and inflation trends and outlook,” Security Bank Vice-President and Research Division Head Angelo B. Taningco commented.
“We foresee BSP to lower the policy rate by 25 bps to 5.75% as the recent inflation data remains well within its target, and the outlook stays favorable,” Nomura Global Markets Research analyst Euben Paracuelles remarked.
Headline inflation recorded at 2.5% in November, pulling the 11-month mean to 3.2%. This is still comfortably within the BSP’s 2-4% target range.
The central bank anticipates inflation to settle at 3.1% this year.
“We believe it is an opportune moment for the BSP to decrease another 25 bps this December. Inflation staying within the BSP’s target is one of the primary reasons we think they will act to cut,” Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., asserted.
Mr. Neri indicated that the inflation forecast for next year also bolsters the argument for a rate reduction.
For the upcoming year, the BSP estimates inflation to average 3.2%, still within the target.
“Recent inflation figures have resided at the lower end of the BSP’s 2-4% target range, and we project that inflation will consistently stay within the target ahead,” Chinabank Research noted.
SLOWING GROWTH
Weaker-than-anticipated economic performance may also trigger additional easing, analysts indicated.
Chinabank Research mentioned that the BSP might be encouraged to further ease policy to “provide extra support to the economy, especially regarding investments.”
“Members are likely to be swayed to ease further in light of the disappointing third-quarter GDP figure, which we accurately expected would fall short of market hopes,” Pantheon Chief Emerging Asia Economist Miguel Chanco highlighted.
The Philippine economy significantly slowed to 5.2% in the third quarter from 6.4% in the previous quarter and 6% a year earlier.
Economic growth averaged 5.8% in the initial nine months, below the government’s revised target of 6-6.5% for the year.
“Recent data on Philippine economic activity have not met the expectations of both government and analysts,” Mr. Neri expressed.
“Therefore, while numerous other variables have held back economic performance since the pandemic, pressure on government officials to implement a rate cut continues to escalate, especially in light of the upcoming midterm elections,” he added.
Predictions regarding the US Federal Reserve’s ongoing easing cycle will also create more opportunities for the BSP’s own rate cuts.
“If the US Fed refrains from delivering its own 25 bps (cut), we anticipate that the BSP will be even more inclined to decrease key interest rates,” Mr. Asuncion stated.
Trader expectations for a cut during the US central bank’s Dec. 17-18 meeting rest at nearly 97%, as reported by CME’s FedWatch Tool, according to Reuters.
“The latest US inflation update reinforced the anticipation of a 25-bp rate reduction from the Fed (this) week,” Chinabank Research stated.
“If this materializes, it would enable the BSP to reduce rates again without exerting additional downward pressure on the peso, since its interest rate differential with the Fed would remain at a favorable 125 bps,” it added.
WEAK PESO
The peso may also play a role in the central bank’s forthcoming monetary policy decision.
“Regarding external factors, the relatively stable performance of the peso against the US dollar in recent weeks may lessen concerns surrounding the impact of exchange rate fluctuations on overall price behavior,” Mr. Neri stated.
Oikonomia Advisory & Research, Inc. economist Reinielle Matt Erece noted that the BSP will likely target a reduction of 25 bps as “any more significant cut could lead to a faster depreciation of the peso against the dollar, especially if the Fed maintains its policy rate.”
The peso concluded at P58.47 per dollar on Friday, diminishing by 23 centavos from its P58.24 close on Thursday.
Last month, the peso dipped to a record-low P59-per-dollar twice.
Moody’s Analytics economist Sarah Tan remarked that a weak peso could postpone the BSP’s rate-cutting cycle.
“Nonetheless, policy easing still appears plausible as it would bolster private consumption, the primary engine of economic growth,” she included.
Meanwhile, Jonathan L. Ravelas, senior adviser at professional services firm Reyes Tacandong & Co., opined there is potential for the central bank to cut rates by 50 bps.
“With inflation at 2.5% in November, year-to-date at 3.2%, well within the BSP’s 2-4% target, they can reduce by 50 bps to promote growth following a slowdown in the third quarter,” he remarked.
“This would help ensure growth of at least 6.3%-6.5%. Concerns regarding a weakening currency due to rate cuts will improve the nation’s competitiveness, which will enhance tourism, manufacturing support, business processes outsourcing companies, and remittances from overseas Filipino workers,” he added.
Mr. Ravelas cautioned that it “might be challenging to cut rates next year as US President-elect Donald J. Trump takes office.”
Conversely, some analysts foresee the possibility of a policy hold on Thursday.
Ser Percival K. Peña-Reyes, director of the Ateneo de Manila University Center for Economic Research and Development, stated the BSP will likely halt its easing cycle and keep its policy rate stable.
“I predict that the Monetary Board will retain its current policy rate. This is influenced by various factors such as fluctuating oil prices, electricity costs, and the depreciating value of the local currency against the dollar,” Emmanuel J. Lopez, professorial lecturer at the University of Santo Tomas Graduate School, commented.
“Despite the deceleration in inflation, consumer prices remain volatile due to holiday demand, pushing prices upward,” he added.
2025 OUTLOOK
Similarly, analysts anticipate the BSP to persist in reducing rates next year.
“For 2025, we project a total reduction of 100 bps likely to be distributed quarterly,” Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp., mentioned.
In a report, Capital Economics expressed its expectation for 100 bps of cuts in 2025 since growth is likely to temper and inflation is expected to remain subdued. This would lower the policy rate to 4.75% by the end of 2025.
This aligns with indications from BSP Governor Eli M. Remolona, Jr., who mentioned that the Monetary Board can implement rate cuts in the 100-bp range next year.
However, he indicated that the BSP may not necessarily reduce at each gathering or every quarter.
“The BSP may implement further rate cuts in 2025, as local economic data may continue to be supportive,” Mr. Neri stated.
On the contrary, he noted that external shocks could “limit the degree of rate reductions.”
“If President Donald Trump follows through on his campaign promises regarding significant tariffs and deportation, heightened US inflation could lead to slower US rate cuts, if not outright policy reversals,” Mr. Neri expressed.
Mr. Ella indicated a “slim chance” that the BSP will pause rate cuts if the Fed also chooses to halt its easing policy.
“However, at this juncture, we view this as a low-probability scenario for the BSP, perhaps a 10% chance of occurring, but this outlook may pivot with key developments and if official BSP communications signal otherwise,” he added.