THE Bangko Sentral ng Pilipinas (BSP) has returned to its easing path, analysts indicated, with anticipated rate reductions in the latter half of the year.
“Considering current forecasts of ‘target-consistent’ inflation and the perspective of a delicate global economy, the BSP will likely persist in relaxing monetary conditions,” stated the Metrobank Research and Market Strategy Department in a report.
It highlighted that the central bank will probably keep “a cautious approach as markets prepare for the repercussions of the trade conflict initiated by Donald J. Trump.”
On Thursday, the BSP recommenced its rate-cutting cycle, implementing a widely expected 25-basis-point (bp) cut. This adjustment brought the target reverse repurchase rate (RRP) down to 5.5% from the previous 5.75%.
BSP Governor Eli M. Remolona, Jr. indicated further rate reductions this year as the benchmark remains “somewhat restrictive.”
Nonetheless, he remarked that rate cuts will likely be executed in “baby steps” or in 25-bp increments. He noted that the central bank is also unlikely to reduce rates during every policy meeting this year.
Mr. Remolona additionally informed Bloomberg TV on Friday that they would only contemplate cutting at every meeting in a “hard-landing scenario,” which was improbable.
For its part, Metrobank anticipates the BSP will implement one more 25-bp reduction this year.
“Following today’s 25-bp cut, we expect one additional similarly sized cut this year, bringing the target RRP to 5.25% by yearend.”
“However, weak economic growth could provide room for the BSP to introduce an extra 25-bp rate reduction towards the end of the year. This is becoming increasingly our baseline scenario,” it stated.
HSBC Global Research economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay mentioned that the central bank has “pivoted towards dovishness.”
Last week, the BSP reported that it has transitioned to a “more accommodative” monetary policy stance.
Mr. Dacanay anticipates the Monetary Board to lower rates two more times this year, with 25-bp cuts at both its August and December meetings. This would reduce the key rate to 5% by the end of 2025.
“This suggests that the BSP will cut during alternate rate-setting meetings (i.e., no rate cuts in June and October),” he added.
There are still four Monetary Board policy meetings scheduled for this year, with the next one on June 19.
“The BSP will likely adopt a very cautious strategy when easing considering the significant level of uncertainty in global trade policy and, interlinked, the risk of FX (foreign exchange) volatility,” Mr. Dacanay remarked.
ANZ Research similarly predicts the central bank to lower rates in the third and fourth quarters at 25 bps each.
“In light of the improvements in the inflation outlook and the downside risks to growth, we now expect two additional rate cuts by the BSP, bringing the policy rate to 5% in 2025,” it mentioned in a report.
Meanwhile, Nomura Global Markets Research looks at an extra 75 bps worth of rate cuts this year.
“With the BSP also recognizing that growth challenges are intensifying due to global trade policy uncertainty, together with our updated inflation forecasts, we are now predicting another 75 bps of rate cuts, driving the terminal rate to 4.75% this year.”
Nomura also indicated the potential for another 25-bp cut “if inflation surprises lower.”
INFLATION OUTLOOK
Analysts asserted that the favorable inflation outlook is one of the primary reasons for the anticipation of further rate cuts.
For its part, Metrobank expects headline inflation to stabilize at 3% this year.
The central bank adjusted its risk-adjusted inflation forecasts down to 2.3% in 2025 from a previous 3.5% and to 3.3% in 2026 from 3.7%.
The latest figures from the local statistics authority revealed that inflation decreased to 1.8% in March, marking its slowest rate in nearly five years.
Mr. Remolona also shared with Bloomberg TV that they are contemplating reviewing their current inflation targets as they are “uncertain if it’s set at the proper level.”
The current target band of 2-4% has a midpoint of 3%, which may be “a bit elevated.”
The central bank is examining its forecasts and may potentially adjust its target to 2.5%, he added.
“Given the benign inflation outlook, the tariffs provide additional justification for increased monetary easing,” Nomura remarked.
Metrobank highlighted the risk of imported inflation amidst global trade uncertainties.
“Potentially higher global commodity prices could infiltrate the domestic market,” it noted.
Mr. Trump announced last week a 90-day suspension on the steep new reciprocal tariffs on most of its trading partners but retained the baseline rate of 10%.
“There exists a downside risk that the easing cycle may conclude more rapidly,” Mr. Dacanay mentioned, pointing to the potential for deteriorating global growth conditions.
“The US reciprocal tariffs will likely inflict damage on global growth. However, the extent of the impact remains highly unpredictable as tariff policies fluctuate weekly.”
Mr. Dacanay remarked that if the interest rate gap widens between the BSP and the US Federal Reserve, it could motivate the former to lower rates.
“This scenario could occur if US inflation increases due to elevated tariffs, while inflation in the Philippines stays low due to excess capacity of manufacturers or exporters globally amidst weak US demand.”
Some economists now predict that the US Federal Reserve will postpone the resumption of its easing cycle until later this year after pausing in January.
“If foreign investors seek Philippine assets to shield themselves from global financial market volatility, the peso may demonstrate resilience, which in turn could provide the BSP the opportunity to cut policy rates more swiftly or more significantly than the Fed,” Mr. Dacanay further stated.
The peso concluded at P56.97 against the dollar on Friday, strengthening from the P57.35 close on Thursday.
“In light of the BSP’s narrower interest rate gap of 100 bps with the Federal Reserve, USD/PHP may face pressure in the short term but is still anticipated to stabilize at P57.70 by yearend,” Metrobank commented.
The BSP’s recent reduction in reserve requirements will also facilitate its monetary easing.
“The ongoing policy easing along with the decrease in the reserve requirement ratio, effective in March, should create a more accommodative policy environment to further stimulate private consumption and investment,” Metrobank added.
Effective late last March, the BSP lowered the reserve requirement ratio (RRR) of universal and commercial banks and nonbank financial institutions with quasi-banking functions by 200 bps to 5% from 7%.
“Recent cuts to the RRR are still permeating the system and aiding policy transmission,” Nomura remarked. — Luisa Maria Jacinta C. Jocson
