By Luisa Maria Jacinta C. Jocson, Journalist
THE PHILIPPINE central bank retains ability to keep lowering interest rates, its leading official stated.
“At this moment, I can inform you we’re still in restrictive territory relative to what we consider the ‘Goldilocks’ rate. Thus, there remains some flexibility to ease,” Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. mentioned during a Rotary Club briefing on Thursday.
The Monetary Board reduced borrowing expenses by a collective 75 basis points (bps) last year, adjusting the target reverse repurchase rate to 5.75%. It enacted 25 bps cuts at each of its meetings in August, October, and December.
“I believe we’re in a solid position. We’re comfortably within the target range (for inflation). Therefore, this time we don’t need to justify to the President the monetary policy as we have met the government’s goal regarding the inflation rate,” Mr. Remolona stated.
Headline inflation rose to 2.9% in December, resulting in a full-year average inflation of 3.2%. This aligned with the BSP’s own predictions for the year and fell well within the 2-4% target range.
“That reflects our current standing, and I believe we’re well-prepared to tackle the challenges lying ahead,” Mr. Remolona conveyed.
“I would assert that we’ve put in the necessary effort. Consequently, we are on what I would describe as firmer ground in the economy.”
Nonetheless, the BSP governor remarked that it remains “premature to declare triumph.”
“We still have tasks to accomplish. We’re confronted with new types of challenges, a highly unusual degree of uncertainty. Therefore, we must exercise a greater degree of caution than before,” he added.
Mr. Remolona highlighted the potential challenges resulting from the uncertainty regarding US President-elect Donald J. Trump’s policies.
“He has indicated tariffs, he has threatened to deport millions from the United States. There is likely to be some retaliation to the tariffs. There will likely be a significant effect on the labor force in the United States, and this will also influence our own economy.”
Among Mr. Trump’s suggestions are a 10% universal tariff and a 60% tariff on Chinese products.
“Concerning tariffs, I would assert we’re in a more favorable position than numerous other countries because in our commerce, a substantial portion involves services trade, business process outsourcing (BPOs), and remittances. Such areas are not easily subjected to tariffs. Hopefully, our services trade will remain secure,” the BSP chief noted.
Mr. Remolona also remarked about the potential implications of the US Federal Reserve’s own easing period. The Fed anticipates two rate cuts for 2025.
“The expectation is that the next instance the Fed may lower rates, if it proceeds to do so, will be post-mid-year,” he stated. “We do not base our monetary policy solely on the Fed’s actions. We analyze our own data, and the Fed’s actions are just another data point.”
EASING TO SLOW?
Meanwhile, Fitch Solutions’ unit BMI indicated that the BSP’s rate cut pace could decelerate this year amidst anticipations of fewer reductions by the Fed.
“The BSP is still positioned to implement another 25-bp cut at its forthcoming meeting. But generally speaking, we believe that the easing pace will diminish against a backdrop of a more hawkish Fed,” it indicated in a separate report.
“To clarify, we believe that the BSP will preemptively cut interest rates to bolster the economy. However, its ability is limited regarding the magnitude of its easing cycle.”
BMI observed that policymakers’ perspectives “have become notably less dovish.”
It referenced Mr. Remolona’s indications that reducing rates by 100 bps this year might be “excessive.”
“The BSP’s hawkish stance is hardly surprising. Central banks worldwide have similarly indicated a cautious approach to monetary easing moving forward, amid policy unpredictability in the US,” BMI stated.
It currently forecasts the central bank will implement 75-bp reductions this year, aiming to conclude the key rate at 5% by the end of 2025. BMI had previously projected the benchmark rate to fall to 4.5% by year-end.
“This would represent 50 bps fewer rate reductions in comparison to our past estimation,” it noted.
Rate reductions are also anticipated to be staggered throughout the year, with 50 bps in the initial half and 25 bps in the latter half, according to BMI.
“The principal constraint is the Fed which has clearly indicated its preference for fewer cuts this year. The Fed has moderated its forecasts for interest rate reductions in light of Trump’s return to the White House.”
“Our analysts believe that monetary conditions in the US will persist as restrictive and expect only 100 bps of cuts in 2025, down from a previous expectation of 150 bps,” BMI further stated.
It also highlighted the repercussions on the local currency.
“Undeniably, the peso has slightly recovered to P58 (per dollar), yet it would have weakened further had the BSP not intervened to mitigate extreme market volatility… The larger narrative is that the BSP lacks the latitude to cut significantly more than the Fed if it aims to maintain external stability,” it added.
Last year, the peso plummeted to the unprecedented P59 mark three times due to a robust dollar spurred by expectations of diminished Fed cuts.
“Our present forecasts are rather conservative, with risks leaning towards additional cuts. Although we identify it as a tail risk, the implementation of blanket tariffs between 10-20% by the US on all goods could further diminish the Philippines’ real GDP (gross domestic product) growth,” BMI stated.
“The BSP will prioritize the economy in such an instance even if this compromises currency stability.”
Nevertheless, the BSP does not need to align its easing cycle with that of the US central bank.
“We believe that this time it will be comparable, with the BSP executing most of its rate cuts in the first half while the Fed will act in the latter half.”
BMI mentioned that the Monetary Board is on course to enact another 25-bp cut at its upcoming meeting on Feb. 20. This is the only rate-setting meeting scheduled for the first quarter.
“Frontloading cuts in the first quarter will only significantly impact growth later in the second half of 2025 due to policy delays… However, given the disappointing economic performance in the third quarter, policymakers will aim to adjust monetary policy settings at the earliest feasible moment,” it added.
The Philippines’ gross domestic product decelerated to 5.2% in the third quarter, down from 6.4% in the second quarter and 6% a year prior. It was also the weakest growth seen in five quarters.
Meanwhile, BMI noted the central bank has “very little concern regarding inflation.”
“Admittedly, we anticipate price pressures will rise in the coming months. However, broadly, it will stay within the BSP’s target range of 2-4% in 2025, barring any external disturbances.”
BMI expects inflation to average 3.3% this year, aligning with the central bank’s projection.