By means of Luisa Maria Jacinta C. Jocson, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) is expected to do so Analysts continued the rate-cutting cycle on Thursday in the final policy review for the year.
A Business world A survey conducted last week showed that 13 out of 16 analysts expect the Monetary Board to cut the target reverse repurchase (RRP) rate by 25 basis points (bps) at its December 19 meeting.
If this is achieved, it would bring the reference interest rate from the current 6% to 5.75%.
This would also be the third straight meeting that the central bank will cut rates since it began its easing cycle in August with a 25 basis point cut. In October, it cut financing costs by another 25 basis points.
On the other hand, one analyst expects the central bank to cut by 50 basis points, while two see the BSP keeping the policy rate unchanged on Thursday.
“We now expect the BSP to cut the RRP rate by 25 basis points at their December 19 policy meeting,” said Emilio S. Neri, Jr., chief economist of the Bank of the Philippine Islands.
“While a pause (or skip) remains possible, recent economic data and external developments have favored monetary easing,” he added.
Analysts attributed expectations of another rate cut to declining inflation and weaker-than-expected third-quarter gross domestic product (GDP) data.
“My prediction is that the BSP will cut by 25 basis points to 5.75% next week. Factors for this decision include GDP growth and inflation trend and outlook,” said Angelo B. Taningco, Vice President of Security Bank and Head of the Research Division.
“We expect the BSP to cut the policy rate by 25 basis points to 5.75%, with the latest inflation data still well within target and the outlook remaining favorable,” said Nomura Global Markets Research analyst Euben Paracuelles.
Overall inflation was 2.5% in November, bringing the eleven-month average to 3.2%. This is still well within the BSP’s target of 2-4%.
The central bank expects inflation to stabilize at 3.1% this year.
“We think it is ripe for the BSP to cut another 25 basis points in December. Inflation remaining within the BSP’s target is one of the key reasons why we believe the BSP will consider cutting,” said Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc.
Mr Neri said the inflation outlook for next year also supports the case for a rate cut.
For next year, the BSP expects inflation to average 3.2%, still within target.
“Recent inflation figures are at the lower end of the BSP’s target range of 2-4%, and we estimate that inflation will remain firmly within the target going forward,” Chinabank Research said.
SLOWING GROWTH
Slower-than-expected economic output could also lead to further easing, analysts said.
Chinabank Research said the BSP may be prompted to further ease policy to “provide additional impetus to the economy, especially on the investment side.”
“Members are likely to be persuaded to ease further in the wake of weaker-than-expected GDP pressure in the third quarter, which we rightly predicted would disappoint market expectations,” said Miguel Chanco, chief emerging Asia economist at Pantheon .
The Philippine economy slowed sharply to 5.2% in the third quarter, compared with 6.4% in the second quarter and 6% a year earlier.
Economic growth averaged 5.8% in the first nine months, lower than the government’s revised target of 6-6.5% for this year.
“Recent data on economic activity in the Philippines has fallen short of government and analyst expectations,” Neri said.
“So, while many other factors have hampered economic performance since the pandemic, the pressure on the government is easingFEfforts to cut interest rates continue to increase, especially in the run-up to the midterm elections,” he added.
Expectations about the US Federal Reserve’s continued easing cycle will also create more room for the BSP’s own rate cuts.
“If the US Fed does not implement its own 25 basis point cut, we believe the BSP will be even more likely to consider cutting key interest rates,” Mr Asuncion said.
According to CME’s FedWatch Tool, traders’ bets on the rate cut at the Dec. 17-18 U.S. central bank meeting are at nearly 97%, Reuters reported.
“The latest US inflation report reinforced expectations of a 25 basis point rate cut by the Fed (this) week,” said Chinabank Research.
“If realized, this would allow the BSP to cut rates again without putting downward pressure on the peso as the interest rate differential with the Fed would remain at a comfortable 125 basis points,” it added.
WEAK PESO
The peso could also be a consideration in the central bank’s next monetary policy decision.
“In terms of external factors, the more stable performance of the peso against the US dollar in recent weeks may allay concerns about the transmission of exchange rate movements to overall price behavior,” Neri said.
Economist Reinielle Matt Erece of Oikonomia Advisory & Research, Inc. said the BSP will opt for a 25 basis point hike because “anything deeper could lead to a faster depreciation of the peso against the dollar, especially if the Fed maintains its policy rate.”
The peso closed at P58.47 per dollar on Friday, weakening 23 centavos from Thursday’s P58.24.
Last month, the peso fell twice to a record high of P59 per dollar.
Moody’s Analytics economist Sarah Tan said a weak peso could slow the BSP’s rate-cutting cycle.
“That said, an easing of policy remains likely as this would support private consumption, the main driver of economic growth,” she added.
Meanwhile, Jonathan L. Ravelas, senior adviser at professional services firm Reyes Tacandong & Co., said there is room for the central bank to cut rates by 50 basis points.
“With inflation at 2.5% in November and 3.2% year-to-date, well within the BSP’s 2-4% target, they can cut by 50 basis points to support growth after slower growth in the third quarter,” he said.
“This will contribute to growth of at least 6.3%-6.5%. The fear of a weakening of the currency due to austerity will improve the country’s competitiveness, boosting tourism, production support, business process outsourcing companies and overseas remittances of Filipino workers,” he added.
Mr Ravelas warned that it “might be difficult to cut interest rates next year, as newly elected US President Donald J. Trump assumesFice.”
On the other hand, some analysts see the possibility of a policy freeze on Thursday.
Ser Percival K. Peña-Reyes, director of the Ateneo de Manila University Center for Economic Research and Development, said the BSP is likely to pause the easing cycle and keep the policy rate unchanged.
“I predict that the Monetary Board will maintain its current policy rate. This is caused by several factors, such as the fluctuating prices of oil, electricity and the depreciating value of the local currency against the dollar,” said Emmanuel J. Lopez, professor at the University of Santo Tomas Graduate School.
“Despite the slowdown in inflation, consumer products remain volatile ahead of the festive season, where demand pushes prices into an upward trend,” he added.
OUTLOOK FOR 2025
Meanwhile, analysts expect the BSP to continue cutting rates next year.
“By 2025, we forecast a total cut of 100 basis points, likely to be staggered once per quarter,” said Patrick M. Ella, an economist at Sun Life Investment Management and Trust Corp.
In a report, Capital Economics said it expects a 100 basis point cut by 2025 as growth is likely to moderate and inflation will remain low. This brings the policy interest rate to 4.75% at the end of 2025.
This is in line with signals from BSP Governor Eli M. Remolona Jr., who said the Monetary Board could implement interest rate cuts of around 100 bp next year.
However, he said the BSP does not necessarily need to make cuts at every meeting or every quarter.
“The BSP could further cut its rates in 2025 as local economic data could remain supportive,” Neri said.
On the other hand, he said external shocks “could limit the magnitude of interest rate cuts.”
“If President Donald Trump makes good on his campaign promises of massive tariffs and deportations, higher U.S. inflation could translate into slower U.S. rate cuts, if not outright policy reversals,” Neri said.
Mr Ella said there is a “remote possibility” that the BSP will suspend interest rate cuts if the Fed also decides to halt policy easing.
“But at the moment we consider this a low probability event for BSP, perhaps a 10% chance of this happening, but this should change if there are significant developments and if thereFThe official BSP language and communication indicate otherwise,” he added.