By means of Luisa Maria Jacinta C. Jocson, Reporter
The Philippine central bank’s interest rate cut The cycle is expected to boost household spending and business activity, allowing companies to obtain financing for expansion on cheaper terms, Metropolitan This is what Bank & Trust Co writes. (Metrobank) in a report.
“Businesses and consumers will receive an additional boost as monetary policy easing begins full swing amid slow inflation,” the report said.
The Bangko Sentral ng Pilipinas (BSP) has cut borrowing costs by a total of 50 basis points (bps) so far this year since the easing cycle began in August.
BSP Governor Eli M. Remolona Jr. announced a new cut of 25 basis points during the Monetary Board’s latest policy review for the year on December 19.
“Private investment has so far lagged other pillars of economic growth – household and government spending – and has yet to recover to pre-pandemic levels,” Metrobank said. “Domestic demand was sluggish, with household expenditure growth flat year-on-year at 4.6% for the Ffirst two quarters of 2024.”
Data from the local statistics bureau shows that household spending fell to 4.6% in the second quarter from 5.5% a year ago, the slowest since the coronavirus pandemic.
“The BSP cuts in policy rates and banks’ reserve requirements (RRR) should help boost business sentiment, allowing companies to secure financing for expansion on relatively cheaper terms,” Metrobank said.
The central bank earlier announced that it would reduce the RRR for universal and commercial banks and non-bank banks Ffinancial institutions with quasi-banking functions by 250 basis points from 9.5% to 7% with effect from Friday.
The BSP chief earlier said that they plan to reduce the RRR to zero before his term ends in 2029.
Metrobank said reducing price pressure would also increase consumer scamsFidentity. InFInflation fell from 3.3% in August to 1.9% in September, the slowest in more than four years. The BSP exexpects inflation to average 3.1% this year.
“For the rest of the year, consumer price increases will remain within BSP’s target range of 2-4% due to favorable fundamentals andFfects and the harvest season help alleviate pressure on food costs,” Metrobank said.
However, it noted upside risks to the outlook, citing high oil prices due to geopolitical tensions and uncertainty in the upcoming US elections.
In a separate report, DBS Bank Ltd. said. that it expects the BSP to cut another 25 bps in December, bringing the benchmark rate to 5.75% by year-end.
“After raising rates the most in the region, the BSP has been preemptive in easing monetary conditions, cutting the RRR last month to complement the easing.”
DBS expects the central bank to cut rates by 100 basis points next year, which could bring the policy rate to 4.75% at the end of 2025.
Mr Remolona previously said it was possible to make a total of 100 basis points of interest rate cuts next year. He said this would be implemented through a “measured approach” and likely in 25 basis point increments, noting that rate cuts would not necessarily be implemented at every meeting.
“While ASEAN-6 central banks have an easing bias, they are not on a predetermined path of interest rate cuts,” DBS said. “The quantum and timing will likely be determined by volatility in financial markets, the mix of domestic growth and inflation and the moves of the US Fed.”
Markets are pricing in a 41 basis point cut this year and another 100 basis points next year, Reuters reports.
Traders expect the Fed to cut borrowing costs by 25 basis points next month, after tempering their commitment to a bigger cut in the wake of strong economic data. The Fed started its easing cycle in September with a 50 basis point rate cut.
ENERGY FINANCING
Meanwhile, more rate cuts could be needed to bring about significant improvementFinsofar as this has a clearly positive impact on energy projects FFinancing is a concern, analysts say.
“The eFThe effect of rate cuts is often gradual, and while the 25 basis point cut is helpful, additional cuts may be necessary for a more substantial impact,” said Toby Allan C. Arce, head of sales trading at Globalinks Securities and Stocks, Inc. , said in a Viber message.
“A reduction to a total of around 50-75 basis points could be more noticeable on borrowing costs, but the exact number will depend on broader economic conditions and inFlationary pressure,” he added.
Last week, the Philippine central bank cut interest rates again by 25 basis points, continuing its easing cycle for the second time in a row.
Alfred Benjamin R. Garcia, head of research at AP Securities, Inc., said interest rate cuts would benefit “capital-intensive sectors” such as infrastructure and power generation.
“We expect that the eFThe impact of the rate cuts will be felt within a few quarters as they work their way through the system, and project financing is likely to pick up again as rates move closer to 5.5%,” he said in a Viber message.
April Lynn Lee-Tan, chief equity strategist at COL Financial Group, Inc., noted that while lower rates are “good because they will make financing costs cheaper for energy companies,” they also consider other factors when developing projects.
“As for whether tariff reductions are enough, there are other factors that utilities take into account, such as the availability of transmission capacity, power demand and the speed at which they can sell their power,” she said via Viber. “These will also have to be evaluated.”
Mr. Arce said the regulatory environment, market demand and infrastructure and network integration are among the factors that need to align “for a robust boost to energy investments.” “Although the financial environment may be favorable as a result of interest rate cuts, continued demand from consumers, businesses or the government necessary for investment growth.”
The 25 basis point interest rate cut gives renewable energy projects an advantage as they require significant investmentsFcapital, according to Jayniel Carl S. Manuel, a stock trader at Seedbox Securities, Inc.
“Renewable energy companies, which often face significant capital expenditure to develop and operate their projects, such as wind farms, solar power plants and hydropower plants, are likely to Fand it is more possible to secure Ffinancing for expansion,” he said via Viber.
“The reduced interest rates directly reduce the cost of borrowing, making long-term investments in these capital-intensive projects more attractive and potentially accelerating their development,” he added.
Mr. Manuel said lower rates could attract more capital as they convey confidence among foreign investors, who could use the Philippine renewable energy sector to tap its “vast natural resources and meet its ambitious renewable energy goals to achieve.”
The government aims to increase the share of renewable energy in its power generation mix from 22% now to 35% by 2030 and 50% by 2040. The Energy Department expects at least 4,000 megawatts (MW) of conventional and renewable energy projects to come online this year.
Mr Manuel said too aggressive rate cuts could fuel yieldsFlower or weaken the peso. “This would increase the cost of imported materials and equipment – both essential when building renewable energy facilities – wiping out some of the costs benefits of cheaper financing.”
“If the interest rate cuts provide a boostFThis could erode cost benefits by increasing operating costs, labor costs and construction costs for energy projects,” Mr Arce said.