By means of Luisa Maria Jacinta C. Jocson, Reporter
THE PHILIPPINE central bank still has room continuing to cut interest rates is the pinnaclecial said.
“Right now, I can tell you that we are still in restrictive territory compared to what we think the ‘Goldilocks’ rate is. So there is still some room for easing,” Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said during a Rotary Club briefing on Thursday.
The Monetary Board cut borrowing costs by a total of 75 basis points (bps) last year, bringing the target reverse repurchase rate to 5.75%. Rate cuts of 25 basis points were implemented at each meeting in August, October and December.
“I think we are in good shape. We are well within the target range (before inflation). So this time we don’t have to explain monetary policy to the president because we have achieved the government’s inflation rate target,” Mr Remolona said.
Headline inflation accelerated to 2.9% in December, bringing the average inflation rate for the year to 3.2%. This was in line with the BSP’s own forecast for the year and well within the target range of 2-4%.
“That’s where we are now and I think we’re in good shape and we’re better prepared for the challenges ahead,” Mr Remolona said.
“I would say we did the hard work. And as a result, we have what I would call a more solid footing in the economy.”
However, the BSP chief said it is still “too early to declare victory.”
“There is still work to be done. We are facing new types of challenges, a very unusual form of uncertainty. And so we have to be a little more careful than before,” he added.
Mr Remolona pointed out the potential challenges arising from the uncertainty surrounding the policies of newly elected US President Donald J. Trump.
“He has threatened tariffs, he has threatened to deport millions of people from the United States. It is likely that there will be some retaliation on the tariffs. There will likely be a significant impact on the workforce in the United States, and it will also affect our own economy.”
Mr Trump’s proposals include a 10% universal tariff and a 60% tariff on Chinese goods.
“In terms of tariffs, I would say we are in better shape than many other countries because a large part of our trade is services trade, business process outsourcing (BPOs) and remittances. It is not so easy to impose tariffs. Hopefully, our services trade will remain intact,” the BSP chief said.
Mr Remolona also pointed to the potential impact of the US Federal Reserve’s own easing cycle. The Fed expects two rate cuts before 2025.
“The expectation is that the next time the Fed will make cuts, if that happens, will be after the middle of the year,” he said. “We don’t decide monetary policy based solely on what the Fed does. We look at our own data, and what the Fed does is just a piece of data.”
REDUCED TO SLOW?
Meanwhile, BMI, part of Fitch Solutions, said the BSP’s pace of easing could slow this year on expectations of fewer Fed rate cuts.
“The BSP is still on track to make another 25 basis point cut at the next meeting. But overall, we think the pace of easing will slow against the backdrop of a more hawkish Fed,” it said in a separate report.
“To be clear, we believe the BSP will bring forward interest rate cuts to support the economy. But hands are tied when it comes to the scale of the easing cycle.”
BMI noted that policymakers’ views have become “significantly less forgiving.”
It cited Mr Remolona’s signals that a 100 basis point rate cut this year could be “too much”.
“The aggressive stance of the BSP is not at all surprising. Central banks around the world have similarly indicated that they will exercise greater restraint in monetary easing going forward, amid policy uncertainty in the US,” BMI said.
She now expects the central bank to implement cuts of 75 basis points this year to bring the policy rate to 5% by the end of 2025. BMI previously predicted that interest rates would be cut to 4.5% by the end of the year.
“This would mean 50 basis points fewer rate cuts compared to our previous projection,” the report said.
The rate cuts are also expected to be spread throughout the year, with 50 basis points in the first half and 25 basis points in the latter part of the year, BMI said.
“The main obstacle is the Fed, which has clearly indicated that it wants fewer cuts this year. The Fed has reversed its own forecasts for rate cuts following Trump’s return to the White House.”
“Our team believes that US monetary settings will remain restrictive and expect only 100 basis points of cuts in 2025, compared to 150 basis points previously,” BMI added.
The impact on the local currency was also noted.
“Granted, the peso has since recovered slightly to P58 (per dollar), but it would have been weaker if the BSP had not intervened to curb excessive market volatility… The bigger picture is that the BSP does not have the room to a lot of savings. more than the Fed if it hopes to maintain external stability,” it added.
Last year, the peso fell three times to a record low P59 level amid a strong dollar, reflecting bets on slower Fed cuts.
“Our current forecasts are quite conservative, with risks leaning towards additional cuts. While we view it as a tail risk, the US imposition of across-the-board tariffs of 10 to 20% on all goods could further limit the Philippines’ real GDP (gross domestic product) growth,” BMI said.
“The BSP will prioritize the economy in such a scenario, even at the expense of currency stability.”
However, the BSP does not have to follow the US central bank in its easing cycle.
“We think it will be similar this time around, with the BSP making the bulk of its policy rate cuts in the first half and the Fed in the second half.”
BMI said the Monetary Board is on track to implement another 25 basis point rate cut at its next meeting on February 20. It is the only interest rate setting meeting for the first quarter.
“Early cuts in the first quarter will only have a material impact on growth later in the second half of 2025 due to policy slowdowns… But given the poor economic performance in the third quarter, policymakers will look to reduce monetary policy settings as quickly as possible .” it added.
The Philippines’ gross domestic product fell to 5.2% in the third quarter, compared with 6.4% in the second quarter and 6% a year ago. It was also the weakest growth in five quarters.
Meanwhile, BMI said the central bank has “very little to worry about when it comes to inflation.”
“Admittedly, we expect price pressure to increase in the coming months. But overall, it will remain within the BSP’s target range of 2-4% in 2025, barring external shocks.”
BMI expects inflation to average 3.3% this year, in line with the central bank’s projection.