BSP cuts rates for a 2nd straight meeting

By Luisa Maria Jacinta C. Jocson, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) continued its easing cycle with a 25-basis-point (bp) rate cut for a second straight meeting and signaled further cuts ahead.

The Monetary Board on Wednesday trimmed the target reverse repurchase (RRP) rate by 25 bps, bringing the key rate to 6% from 6.25%.

This was also in line with the expectations of 16 out of 19 analysts surveyed in a BusinessWorld poll last week.

Rates on the overnight deposit and lending facilities were also lowered to 5.5% and 6.5%, respectively, which are set to take effect today (Oct. 17).

The central bank has now lowered borrowing costs by a total of 50 bps since it began its easing cycle in August with a 25-bp cut, the first rate cut since November 2020.

BSP Governor Eli M. Remolona, Jr. on Wednesday said that the Monetary Board’s decision is due to its assessment that “price pressures remain manageable.”

“On balance, the within-target inflation outlook and well-anchored inflation expectations continue to support the BSP’s shift toward less restrictive monetary policy,” he said.

“Nonetheless, the monetary authority will continue to closely monitor the emerging upside risks to inflation, including geopolitical factors.”

However, the BSP chief said the balance of risks to the inflation outlook for next year until 2026 has shifted to the upside, citing expectations of higher electricity rates and minimum wages outside Metro Manila.

The central bank slashed its baseline inflation forecast to 3.1% (from 3.4%) for 2024. On the other hand, it raised the inflation projection to 3.2% (from 3.1%) for 2025 and 3.4% (from 3.2%) for 2026.

The risk-adjusted inflation forecast was likewise cut to 3.1% (from 3.3%) for 2024. Projections for 2025 and 2026 were raised to 3.3% (from 2.9%) and 3.7% (from 3.3%), respectively.

BSP Assistant Governor Zeno Ronald R. Abenoja said that the relevant horizon to consider is the inflation outlook for 2025 to 2026.

“For 2025 and 2026, we are seeing a slightly higher, but still within-target inflation averages and the slight uptick is due to higher global oil prices, which we have also observed the past few weeks, as well as some positive base effects in the next 12 months,” he said.

Mr. Abenoja said that inflation may settle slightly below the midpoint of the BSP’s 2-4% target for the rest of the year and the first half of 2025.

“Then we can see inflation picking up by the second half of 2025 but still within target range,” he added.

Headline inflation eased to 1.9% in September from 3.3% in August, its slowest print in over four years, though Mr. Remolona noted that the slower print during the month was primarily due to base effects.

In the first nine months, headline inflation averaged 3.4%.

Meanwhile, Mr. Remolona also said that economic growth is expected to remain strong. Gross domestic product (GDP) averaged 6% in the first half, at the low end of the government’s 6-7% target for the full year.

“This reflects improved prospects for household income and consumption, investments, and government spending, which are supported by the start of the monetary easing cycle in August and the announced reduction in reserve requirements in October,” he added.

‘BABY STEPS’
The BSP chief signaled the possibility of another 25-bp cut at the Monetary Board’s last meeting for the year on Dec. 19.

If realized, this would bring the benchmark rate to 5.75% by end-2024.

However, Mr. Remolona said that a 50-bp cut in December was “unlikely.”

“What would make 50 bps possible would be a scenario in which we see a hard landing, but otherwise that’s too aggressive a cut,” he said.

For 2025, Mr. Remolona said that it was also possible to deliver a total of 100-bp worth of rate cuts.

“An additional 100 bps (after the cuts we will have made in 2024) would be somewhat on the dovish side. It’s possible, but somewhat dovish,” he said.

The central bank will also opt for a more “measured approach” in its easing.

“If we rule out a hard landing, then as I have said, we prefer to take baby steps in terms of adjusting the policy rate. Meaning, 25 bps at a time, but not necessarily every quarter, or not necessarily every meeting,” Mr. Remolona said.

MORE CUTS
Meanwhile, analysts likewise expect further rate reductions for the rest of the year and until 2025.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said he sees “many more rate cuts to come.”

Though headline inflation may breach the 2% mark in October, this will not prevent the BSP from continuing its easing path, he said in a commentary.

“That said, we expect inflation to hug this lower bound for the foreseeable future barring any unexpected shocks, leaving the door wide open for more consecutive rate cuts,” Mr. Chanco said.

“Our current forecasts see average annual inflation falling to 2.4% in 2025 from an estimated 3.2% this year, as the headline rate is anchored by still-subsiding core inflation, reflecting the economy’s relatively sluggish rate of growth,” he added.

Capital Economics assistant economist Harry Chambers likewise said inflationary pressures are seen to remain weak.

“Falling food price inflation and slower growth should keep a lid on inflation,” he said in a report.

Mr. Chambers said that further gradual easing is likely in the next quarters.

“The economic backdrop provides scope for looser monetary conditions. GDP growth slowed in the second quarter on the back of declines in both private consumption and exports,” he said.

“We expect growth to remain subdued on the back of a combination of tighter fiscal policy and weak export demand,” he added.

Mr. Chanco said that the release of third-quarter economic data will be crucial to the BSP’s next monetary policy decision.

Third-quarter GDP will be released on Nov. 7.

“The third-quarter GDP report due in early November likely will induce a greater sense of urgency on the part of the Board, as year-on-year growth probably will fall sharply from the second quarter’s 6.3% pace with base effects turning quite adverse,” he said.

For its part, Pantheon Macroeconomics sees the possibility of 50-bp worth of cuts.

“We continue to believe that the pace of easing will be stepped up to 50 bps each time from the December meeting, until the benchmark rate falls to a terminal level of 4% by the middle of next year,” Mr. Chanco said.

Meanwhile, Capital Economics expects a 25-bp cut in December.

“Our end-2025 interest rate forecast of 4.75% is more dovish than the consensus,” Mr. Chambers said.