By means of Luisa Maria Jacinta C. Jocson, Reporter
SIDE RISKS to the inflation outlook could slow the Bangko The Sentral ng Pilipinas (BSP) rate cut cycle, analysts said.
“Should these upside risks materialize, we may not be looking at a 100 basis points (bp) cut for 2025, but perhaps a more modest 50 to 75 bp cut. As the BSP puts it, the final decision will remain data-driven,” GlobalSource country analyst Diwa C. Guinigundo said in a report.
Last week, the Monetary Board delivered a third outright rate cut in its final policy review for the year. This brought the benchmark from 6% to 5.75%.
The central bank has cut rates by a total of 75 basis points this year since the easing cycle began in August.
“We think cumulative interest rate cuts will amount to 75 basis points in 2025. We will revise this forecast if adverse geopolitical developments result in higher-than-expected inflation,” ANZ Research said, noting the central bank suggested a “deeper” rate cut cycle next year.
BSP Governor Eli M. Remolona Jr. said achieving 100 basis points of cuts next year could be “too much.”
The central bank will likely continue to cut interest rates in “baby steps” as “insurance against a possible rise in inflation,” Mr Remolona added.
Mr Guinigundo said it was appropriate for the BSP to gradually shift to a less restrictive monetary policy.
“Given the risks, the BSP must conserve its ammunition and choose to remain data-dependent,” he said.
He noted that the BSP also continued to flag upside risks to the inflation outlook. “This would partly explain the BSP’s decision to go slowly into easing mode,” Mr Guinigundo said.
The BSP said the balance of risks to the inflation outlook for 2025 to 2026 remains tilted upward.
It has raised some of its baseline and risk-adjusted forecasts for 2025 and 2026, although these all remain within the target range of 2 to 4%. The central bank raised its headline inflation forecast to 3.3% for 2025 (from 3.2%) and 3.5% for 2026 (from 3.4%).
Meanwhile, risk-adjusted forecasts were also increased to 3.4% for 2025 (from 3.3%). The risk-adjusted projection for 2026 was maintained at 3.7%.
A report from Nomura Global Markets Research analysts Euben Paracuelles and Nabila Amani shows that it expects the BSP to make a total of 75 basis points of cuts before pausing in mid-2025.
“We maintain our forecast of 25 basis points of rate cuts through each of the first three meetings in 2025 before pausing from there.”
“As is clear from BSP’s guidance in its last three decisions, BSP’s next decision will be largely determined by the inflation outlook for 2025 and 2026,” Nomura said.
It also noted that if headline inflation continues to decline, the BSP “may seek to further remove restrictiveness in monetary policy to support a recovery in growth prospects, which faces downside risks.”
Meanwhile, Nomura also said it expects the BSP to make more rate cuts than the US Federal Reserve.
“As a result, we still think the BSP can cut more than the Fed, and indeed continue to decouple from its regional peers. In our view, BSP’s more orthodox approach is appropriate and provides much-needed clarity when the global environment is highly uncertain, thereby enhancing the credibility of BSP’s policies,” the report said.
Reuters reported that US central bankers now predict they will make only two-quarter percentage point rate cuts by the end of 2025.
With policy relaxation next year, that is half a percentage point less than beforeFThe numbers due from September, with the Fed’s projections of inflation for the first year of the new Trump administration rising from 2.1% in their previous projections to 2.5% in the current one.
Capital economics assistant economist Harry Chambers said the Philippines’ economic growth will also make this possible the central bank to accelerate easing.
“A strong economy gives the BSP a platform to phase out interest rate cuts. GDP growth recovered in the third quarter of the year, and while tight fiscal policy and weaker global demand will weigh on demand, strong consumption should ensure another year of solid growth in 2025,” he added .
Capital Economics expects an interest rate cut of 100 basis points next year, bringing the policy rate to 4.75% at the end of 2025.
OTHER RISKS
Meanwhile, Mr Guinigundo flagged other upside risks that could fuel inflation in the near term.
“The plan to continue lowering the country’s required reserve ratio could actually result in a larger injection of liquidity, which, other things being equal, could also prove to be inflationary,” he said.
“This is an issue that the BSP may have to face in the future given its aggressive stance to reduce it to zero.”
The BSP reduced reserve requirements for universal and commercial banks and non-bank financial institutions with quasi-banking functions by 250 basis points to 7% from 9.5%, effective October 25 last year.
Mr Remolona has said major lenders’ reserve requirements could be reduced to zero before his term ends in 2029.
Meanwhile, Mr Guinigundo also cited geopolitical tensions and less than expected interest rate cuts by the US central bank.
He said the Fed may also have to “be slow in its easing policy because of the potential inflationary effects of the new Trump administration’s higher rate policies, more tax cuts and mass deportations.”
“The hit to the peso cannot be dismissed because it feeds into inflation. The US Fed could be deterred from maximizing its flexibility to lower its own interest rate target,” he added.
The peso closed at P58.81 per dollar on Friday, up 19 centavos from a record low P59 on Thursday. So far this year, the peso has fallen to the P59 mark three times.
“Tensions could remain high given continued hostility in the Middle East and Eastern Europe. They could have an additional impact on foreign trade and capital flows and ultimately on the depreciation of the peso and domestic inflationMr Guinigundo added.