THE LAST September inflationThe improved outlook will give the Bangko Sentral ng Pilipinas (BSP) more than enough room to cut rates further, analysts said.
“With an even better inFGiven the outlook on the horizon, the risk of the BSP cutting its policy rate twice again this year is largely increasing,” HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay said in a report.
The consumer price index (CPI) fell sharply from 3.3% in August to 1.9% in September. September marked the FIt was the first time in more than four years that inflation was below 2%.
“In terms of monetary policy, the headline decline is inFThis reinforces our view that the BSP will continue to cut rates this year after kicking off the easing cycle early,” analysts Euben Paracuelles and Nabila Amani of Nomura Global Markets Research said in a commentary.
The BSP said in a statement on Friday that the September imprint affhis view is thatFThe economy will continue its downward trend in the following quarter.
The Bank of the Philippine Islands (BPI) said this in a commentaryFInflation may have bottomed out this year and could potentially recover in the fourth quarter as the baseline fadesFfects.
“Still, we expect insideFGrowth will remain contained and may remain below 3% if there are no supply shocks. This favorable situation could last until 2025,” BPI said.
‘THE FIGHT IS FINALLY OVER’
In the Ffirst nine months, head onFThe interest rate averaged 3.4%, which is also the central bank’s annual forecast for 2024.
“The last time inflation was this low, the Philippines was in lockdown due to the COVID-19 (coronavirus disease 2019) pandemic. It almost feels too good to be true as the Philippine economy experienced a wave of inflation that lasted almost two years,” Mr. Dacanay said.
“But we think that the September CPI marks the day when the BSP is activeFrelationship struggle Feventually over – and all thanks to a mix of hard work and luck.’
Mr Dacanay attributed this to both monetary and non-monetary measures over the past year, such as the BSP’s aggressive tightening cycle from May 2022 to October 2023 and lowering trade barriers on key commodities.
He said inflation would decline further after India lifted trade restrictions on non-basmati milled rice.
“This comes at an opportune time for the Philippines as rice prices have not yet fallen even with the tariFf interest rate cut in July. A better outlook for global grain supply should help the situation so that retail rice prices can finally fall,” Mr Dacanay added.
In September, rice inflation fell sharply to 5.7%, compared with 14.7% in August and 17.9% last year, partly due to low base effects. This was also the lowest rice inflation since hitting 4.2% in July 2023.
Meanwhile, Nomura expects insideFThis year inflation will be 3.1% and in 2025 2.3%.
“Our forecast pencils in CPI have arrivedFwill be around 1.9% in the fourth quarter of 2024, slightly below the BSP target of 2-4%,” the report said.
“We still assume the impact of the rice tariFThe cuts will become apparent from October, but this could be partially mitigated by a likely decline in the food items that were the biggest drag in September,” it added.
On the other hand, BPI noted risks to this inflation outlook, citing the impact of La Niña and African swine fever (ASF).
“Inflation in the Philippines remains sensitive to climate conditions, and another extreme weather event could cause a spike. On the other hand, stable commodity prices during the Chinese economic slowdown can offset these risks. We now expect all year roundF3.2% in 2024 and 2.8% in 2025,” it added.
The “favorable” prospects for inFlation gives the central bank the Fflexibility to continue the path of policy easing, BPI said.
“We foresee two more cuts to the policy rate in 2024, and likely further cuts in 2025, potentially pushing the policy rate down to 4.5% to 5% by the end of 2025,” the report said.
BSP Governor Eli M. Remolona Jr. said last week that the Monetary Board could implement a cut of 25 basis points (bps) at its October 16 meeting, followed by another cut at its December 19 meeting.
The central bank chief has said they aim to cut the policy rate to 4.5% by the end of 2025 to support the economy.
“But with insideFAs risk will largely disappear, largely due to rice, the scope to cut policy rates at both the October and December rate-setting meetings increases dramatically,” Mr Dacanay said.
Nomura also expects the BSP to cut by 25 basis points each at the last two meetings of the year.
“Furthermore, we also expect BSP to make cuts for the first three meetings of 2025 before taking a break. This would bring the RRP rate to 5% by May 2025 (i.e. a total of cuts of 150 basis points in this cycle).”
However, analysts noted that the BSP is unlikely to be aggressive in its policy cuts.
“There are currently several uncertainties in the current environment, with inflation risks related to supply constraints, both local and global, amplified by geopolitical risks. Therefore, we do not expect interest rates to return to the low levels of the past ten years,” BPI said.
“The Fed’s rate cuts also support further easing by the BSP, but we still think the BSP is unlikely to be more aggressive with 50bp rate cuts, as the Fed was last month,” Nomura said.
Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., also pointed to the possibility of delayed easing by the BSP.
“We believe that BSP will not withdraw its commitment to further relaxation. However, it could be postponed amid a massive escalation of tensions in the Middle East, which could push global prices higher, disrupting inflation expectations in the short to medium term,” he said in a Viber message.
RRR CUTTING
BPI chief economist Emilio S. Neri Jr. said the central bank’s latest decision to cut banks’ reserve requirement ratios (RRR) will also support the BSP in making cuts of 25 basis points.
“It is possible that BSP’s substantial cut in RRP is sufficiently complementary to a measured approach of cutting RRP by 25 basis points at a time that it may not be necessary to make a massive RRP cut in October or December ” he said in a Viber message.
The BSP announced last month that it would reduce the RRR for universal and commercial banks and non-bank financial institutions with quasi-banking functions by 250 basis points to 7% from 9.5% on October 25.
It will also reduce the RRR for digital banks by 200 basis points to 4%, while the ratio for thrift lenders will be reduced by 100 basis points to 1%. The RRR of rural and cooperative banks will also decline by 100 basis points to 0%.
Mr Remolona previously said the RRR could be reduced to zero before his term ends in 2029.
“In addition to possible interest rate cuts, the inFThe outlook could also allow the BSP to further cut the RRR,” BPI said.
BPI said a 1% reduction in RRR will free up P150 billion in deposits. “The recent 250 basis point cut is expected to free up P375 billion in deposits. As a result, we expect agency costs to decline, which could push down interest rates on loans. This could also lead to improvements in capital markets and the banking system, as banks can deploy their resources more efficiently,” the report said.
Further cuts to capital reserves are also unlikely to fuel inflation, BPI said.
“The BSP has robust liquidity management tools in place to absorb excess funds released into the system. These tools have been used effectively over the years and have ensured that liquidity levels remain within the control of the BSP,” the report said. — Luisa Maria Jacinta C. Jocson