The BANGKO SENTRAL ng Pilipinas (BSP) is likely to continue its interest rate cutting cycle despite a slight rise in inflation in November, analysts said.
However, risks such as the weakening of the peso could prompt the central bank to be more cautious about further easing.
“Overall, inflationary pressures were not broad-based and the near-term outlook remains favorable. Therefore, we believe the BSP will cut its policy rate by 25 basis points (bps) at the next meeting in December,” ANZ Research said.
Headline inflation accelerated from 2.3% in October to 2.5% annualized in November, mainly due to higher food prices due to typhoon damage.
This brought the average inflation rate over the eleven-month period to 3.2%, well within the target range of 2-4%.
Miguel Chanco, chief economist at Pantheon Macroeconomics, said it was “completely clear” for a third straight rate cut later this month.
“Crucially, the result was also well within the BSP’s forecast range of 2.2% to 3%, meaning the bank will almost certainly cut its target reverse repo rate by 25 basis points to 5.75 later this month %,” he said. .
The Monetary Board will hold its final policy-setting meeting for the year on December 19.
The central bank could choose to pause the easing cycle or implement another 25 basis point rate cut later this month, BSP Governor Eli M. Remolona Jr. said earlier.
He said inflationary pressures could push them to keep rates steady, while a cut is likely if economic growth remains weak.
Since August, the Monetary Board has implemented a total of 50 basis points of interest rate cuts, bringing the policy rate to 6%.
“Soft inflation pressures support our view of a rate cut at the December 19 meeting, on top of growth in the third quarter of 2024, which surprised on the negative,” said HSBC economist for ASEAN Aris D. Dacanay.
Mr Chanco pointed to the “disappointing” gross domestic product (GDP) print in the third quarter, which would leave room for more rate cuts.
The Philippine economy grew at a weaker-than-expected 5.2% in the July-September period, slower than growth of 6.4% in the second quarter and 6% a year ago.
This was also the weakest growth since the 4.3% growth in the second quarter of 2023.
“However, the Governing Council’s rate cutting cycle is far from over, despite the apparent global recalibration of policy rate expectations since the US elections,” Mr Chanco said.
“The BSP confirmed in its response to the latest inflation data that it will ‘continue to maintain a measured approach in its easing cycle’, echoing the same language used in October when it last cut rates by 25 basis points. ”
Inflation will also remain within the target bandwidth of 2-4% in the future.
“On balance, inflation should quickly stabilize comfortably below the mid-3% range of the BSP target – barring any shocks – paving the way for the 100 basis points in further easing we expect next year,” it said Mr Chanco.
The BSP expects inflation to be within the target range between this year and 2026. The BSP expects inflation to average 3.1% this year, 3.2% in 2025 and 3.4% in 2026.
However, the central bank also warned that the balance of risks to next year’s inflation outlook until 2026 has shifted upward.
According to the BSP’s risk-adjusted forecasts, inflation will reach 3.3% next year and 3.7% in 2026.
“At the same time, risks to our 4.75% base rate base for end-2025 are clearly tilted to the downside as policy will remain excessively tight in real terms even after additional cuts of 125 basis points,” Chanco said.
By 2025, ANZ Research expects a total of 75 basis points of cuts to “help strengthen domestic demand.”
Mr Remolona has raised the possibility of interest rate cuts of up to 100 basis points next year.
PESO WEAKNESS
Meanwhile, Mr. Dacanay said the recent devaluation of the peso could pose a risk to the BSP’s easing cycle.
“The only upside risk to monetary policy is the currency. The USD-PHP (US dollar-Philippine peso) fluctuated between P58.5 and P59 during November. In fact, it was millimeters away from breaking its all-time highs on November 26.”
The peso fell to an all-time low of P59 against the dollar twice during the month – on November 21 and November 26.
“But things have gotten better since then. The PHP has now appreciated to P58.23 against the USD and according to HSBC FX, further support should come due to the seasonality of remittances,” he added.
The peso has since strengthened after falling to record lows last month. The local unit appreciated to P57.735 per dollar on Friday, up 14.5 centavos from Thursday’s P57.88.
Mr. Dacanay also said the tone of the U.S. Federal Reserve “will be critical.”
“However, it will be crucial to monitor the Fed’s tone over the next two weeks. Any shift to more aggressive rhetoric could introduce volatility into the currency and prompt the BSP to interrupt the easing cycle,” he added.
Reuters reported that U.S. interest rate futures had priced in a roughly 90% chance that the Fed would cut rates by 25 basis points at the Dec. 17-18 policy meeting, according to LSEG calculations that previously saw only a 72% chance.
The Fed has cut rates by 75 basis points since September, when it launched its easing cycle. — Luisa Maria Jacinta C. Jocson