BSP rate cuts to boost consumption, spur business expansion — Metrobank

By Luisa Maria Jacinta C. Jocson, Reporter

THE PHILIPPINE central bank’s rate-cutting cycle is expected to boost household spending and business activity, allowing companies to get funding for expansion on cheaper terms, Metropolitan Bank & Trust Co. (Metrobank) said in a report.

“Businesses and consumers will get an extra boost as monetary policy easing goes into full swing amid slow inflation,” it said.

The Bangko Sentral ng Pilipinas (BSP) has so far lowered borrowing costs by a total of 50 basis points (bps) this year since it began its easing cycle in August.

BSP Governor Eli M. Remolona, Jr. has signaled another 25-bp cut at the Monetary Board’s last policy review for the year on Dec. 19.

“Private investment has so far lagged other economic-growth legs — household and public spending — and has yet to recover to its pre-pandemic levels,” Metrobank said. “Domestic demand has been sluggish, with household spending growth being flat at 4.6% year on year for the first two quarters of 2024.”

Data from the local statistics agency showed household spending eased to 4.6% in the second quarter from 5.5% a year ago, the slowest since the coronavirus pandemic.

“The BSP cuts to policy interest rates and banks’ reserve requirement ratio (RRR) should help stoke business sentiment, allowing companies to secure funding for expansion on relatively cheaper terms,” Metrobank said.

The central bank earlier announced that it would reduce the RRR for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% from 9.5% effective on Friday.

The BSP chief earlier said they are looking to bring down the RRR to as low as zero before his term ends in 2029.

Metrobank said easing price pressures would also boost consumer confidence. Inflation eased to 1.9% in September from 3.3% in August, the slowest in more than four years. The BSP expects inflation to average 3.1% this year.

“For the rest of the year, the consumer price rise will stay within BSP’s 2-4% target range due to favorable base effects and the harvest season helping ease pressure on food costs,” Metrobank said.

However, it noted upside risks to the outlook, citing elevated oil prices due to geopolitical tensions and uncertainty in the upcoming US elections.

In a separate report, DBS Bank Ltd. said it expects the BSP to deliver another 25-bp cut in December, bringing the benchmark rate to 5.75% by yearend.

“Having raised rates by the most in the region, the BSP has been preemptive in loosening monetary conditions, with the RRR cut last month to complement the easing bias.”

DBS expects the central bank to slash rates by 100 bps next year, which could bring the key rate to 4.75% by end-2025.

Mr. Remolona earlier said it was possible to deliver a total of 100-bp worth of rate cuts next year. He said this would be implemented through a “measured approach” and likely in increments of 25 bps, while noting rate cuts would not necessarily be delivered at every meeting.

“In all, while the ASEAN-6 central banks have a dovish tendency, they are not on a predetermined rate cut path,” DBS said. “The quantum and timing are likely to be dictated by financial market volatility, domestic growth-inflation mix and the US Fed’s moves.”

Markets are pricing in 41 bps of cuts for the year, with another 100 bps priced in for next year, Reuters reported.

Traders expect the Fed to lower borrowing costs by 25 bps next month, having tempered their wager of a larger cut in the wake of strong economic data. The Fed kicked off its easing cycle with a 50 bps cut in September.

ENERGY FINANCING
Meanwhile, more rate cuts might be needed to have a significantly positive impact on energy projects as far as financing is concerned, analysts said.

“The effect of rate cuts is often gradual, and while the 25-basis-point cut is helpful, additional cuts may be required for a more substantial impact,” Toby Allan C. Arce, head of sales trading at Globalinks Securities and Stocks, Inc., said in a Viber message.

“A cut to around 50-75 basis points in total might be more noticeable for financing costs, but the exact number will depend on broader economic conditions and inflationary pressures,” he added.

Last week, the Philippine central bank delivered another 25-bp cut, continuing its easing cycle for a second straight meeting.

Alfred Benjamin R. Garcia, research head at AP Securities, Inc., said rate cuts are favorable for “capital-intensive sectors” like infrastructure and power generation.

“We expect that the effect of the rate cuts will start to be felt in a couple of quarters as they work their way into the system, and project financing will likely start picking up as rates get closer to 5.5%,” he said in a Viber message.

April Lynn Lee-Tan, chief equity strategist at COL Financial Group, Inc., noted that while lower rates “are good as they will make financing cost cheaper for power companies,” they also consider other factors in developing projects.

“As to whether rate cuts are enough, there are other factors that power companies consider such as the availability of transmission capacity, demand for power and the rate at which they can sell their power,” she said via Viber. “These will also have to be evaluated.”

Mr. Arce said the regulatory environment, market demand and infrastructure and grid integration are some of the factors needed to be aligned “for a robust boost in energy investments.” “While the financial environment may be favorable due to rate cuts, sustained demand from consumers, businesses or the government is necessary for investment growth.”

The 25-bp rate cut gives renewable energy projects a leg up because they require significant capital, according to Jayniel Carl S. Manuel, an equity trader at Seedbox Securities, Inc.

“Renewable energy companies, which often face substantial capital expenditures for the development and operation of their projects such as wind farms, solar power plants and hydroelectric facilities, will likely find it more feasible to secure financing for expansion,” he said via Viber.

“The reduced interest rates directly lower the cost of borrowing, making long-term investments in these capital-intensive projects more attractive and potentially accelerating their development,” he added.

Mr. Manuel said lower rates could draw more capital because they signal confidence to foreign investors, which the Philippine renewable energy sector could use to tap its “vast natural resources and achieve its ambitious renewable energy goals.”

The government seeks to raise the share of renewable energy in its power generation mix to 35% by 2030 and 50% by 2040 from 22% now. The Energy department expects at least 4,000 megawatts (MW) of conventional and renewable energy projects to come online this year.

Mr. Manuel said too aggressive rate cuts could fuel inflation or weaken the peso. “This would raise the cost of imported materials and equipment — both essential in building renewable energy facilities — thus negating some of the benefits of cheaper financing.”

“If rate cuts spur inflation, this could erode the cost benefits by increasing operating expenses, labor costs and construction costs for energy projects,” Mr. Arce said.