By means of Luisa Maria Jacinta C. Jocson, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) cut its key interest rate for the third time in a row on Thursday, but signaled the possibility of fewer cuts in 2025.
The Monetary Board on Wednesday cut the target reverse repurchase rate by 25 basis points (bps), taking the policy rate to 5.75% from 6%.
This was also in line with the expectations of 13 of the 16 analysts surveyed in a Business world poll from last week.
The rates on overnight deposits and credit facilities were also reduced to 5.25% and 6.25% respectively.
The central bank has now cut rates by a total of 75 basis points this year since the easing cycle began in August.
“Looking ahead, the Monetary Council will maintain a measured approach to monetary policy easing to ensure price stability conducive to sustainable economic growth and employment,” said BSP Governor Eli M. Remolona Jr.
He said inflation is expected to remain within the target range of 2-4% over the policy period.
“On balance, the inflation outlook remains within target and well-anchored inflation expectations continue to support the BSP’s shift to a less restrictive monetary policy,” he said.
However, Mr. Remolona said the balance of risks to the inflation outlook remains tilted upward, citing “potential upward adjustments in transportation tariffs and electricity rates.”
“The impact of lower import tariffs on rice remains the biggest negativerisk to inflation,” he added.
The central bank raised its headline inflation forecast to 3.3% for 2025 (from 3.2%) and 3.5% for 2026 (from 3.4%). For this year, the company also revised its forecast upward to 3.2% from 3.1% previously.
Meanwhile, risk-adjusted forecasts were also increased to 3.2% this year (from 3.1%) and 3.4% for 2025 (from 3.3%). The risk-adjusted projection for 2026 was maintained at 3.7%.
Both the baseline and risk-adjusted forecasts remain within the BSP’s 2-4% target range.
“Nevertheless, the monetary authority will continue to closely monitor emerging upside risks to inflation, in particular geopolitical factors,” Mr Remolona added.
Meanwhile, the BSP also expects domestic demand to “remain strong but subdued.”
“Private domestic spending is expected to be supported by declining inflation and improving labor market conditions. However, downside risks in the external environment could materialize and dampen economic activity and market sentiment,” he said.
STILL ‘ON THE TIGHT SIDE’
Asked how much the BSP will cut in 2025, Mr Remolona said: “During our discussion today, there was a feeling that 100 basis points in 2025 might be too much, but zero would also be too little.”
He previously said they could cut rates close to 100 basis points in 2025, but not necessarily at every meeting or every quarter.
“Even with the 75 basis points, we are still on the tight side according to all our estimates. That is a kind of insurance for us. The reason we are cutting back in small increments is because we are not absolutely sure about inflation,” he said.
“We are still afraid that inflation will rise again. Cutting in small increments means we are still somewhat tight at this point. That is a kind of insurance against a possible increase in inflation.”
If the figures are not too “surprising”, the Monetary Council could continue its rate-cutting cycle, Mr Remolona said.
“If there is a big surprise, we can change the direction of monetary policy. But if the surprises are small enough, there is no reason to really change the direction we are taking.”
PESO
Meanwhile, Mr. Remolona said the BSP is keeping an eye on the peso and its potential impact on inflation.
“We are concerned about the flow. The pass-through usually becomes important if there is sufficient depreciation. So there is some kind of threshold and we are still trying to refine our estimates of that threshold,” he said.
The peso closed at P59 per dollar on Thursday, weakening by one centavo from Wednesday’s closing price of P58.99.
So far this year, the local currency has hit all-time lows three times, including on November 26 and November 21.
Analysts said expectations of inflation remaining within target would allow the BSP to continue easing next year.
“Nominal interest rates are currently just above the 2% lower bound, and we expect them to remain largely at this level for the next 12 months – barring an unexpected supply shock to prices – prompting the (Monetary) Council gets more space. to ease policy,” Miguel Chanco, chief emerging Asia economist at Pantheon, said in a report.
Pantheon expects annual inflation to decline next year to 2.4% from 3.2% this year. The country also expects a cut of 100 basis points next year.
“The central bank may have room to cut rates further in the first half of 2025, supported by a favorable inflation outlook,” said Emilio S. Neri, Jr., chief economist of the Bank of the Philippine Islands.
“Barring unforeseen supply shocks, inflation could remain within the BSP’s target range next year.”
Mr Neri also cited expectations of further easing from the US Federal Reserve’s latest dot plot.
“The behavior of USD/PHP may remain manageable if the pace of BSP rate cuts is reasonably aligned with the Fed’s trajectory,” he added.
The Fed cut rates on Wednesday, but has announced fewer rate cuts in 2025.
However, Mr Neri noted that the BSP is unlikely to aggressively cut rates next year as “global price risks could thwart excessive monetary easing measures.”
The Monetary Board could make up to 50 basis points of cuts for next year, he said.
“While the first half of the year may present opportunities, cutting rates in the second half could be more challenging as the Federal Reserve’s outlook could change in response to President Trump’s potentially inflationary policies.”
“In an adverse scenario, higher rates and mass deportations could reignite inflation in the US, which could force global central banks to turn to monetary tightening,” he added.