BSP to cut rates by 25 bps — poll

By Luisa Maria Jacinta C. Jocson, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) will likely continue its easing cycle with another 25-basis-point (bp) rate cut at its meeting on Wednesday, analysts said. 

A BusinessWorld poll conducted last week showed that 16 out of 19 analysts expect the Monetary Board to reduce rates by 25 bps at its policy review meeting on Oct. 16.

If realized, this would bring the target reverse repurchase rate to 6% from the current 6.25%.

On the other hand, two analysts expect the central bank to cut by 50 bps, while one analyst sees the BSP keeping policy rates unchanged on Wednesday.

The Monetary Board began its easing cycle with a 25-bp cut in August, the first time it reduced borrowing costs in nearly four years.

“I’m expecting the Board to cut further (this) week, by an additional 25 bps. This is especially so in the wake of the extremely soft September print, which undershot expectations, including the BSP’s own forecast range,” Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said in an e-mail.

Mr. Chanco said that the decision to cut will be “fairly ‘easy’ as the BSP has “so much room to continue normalizing policy without risking going overboard, in view of how fast and how much inflation has fallen in recent months.”

Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp., said that slowing inflation makes a “solid case” for the BSP to cut rates.

Headline inflation sharply eased to 1.9% in September from 3.3% in August. This was also the slowest print in over four years or since the 1.6% clip in May 2020.

“Better still, inflation eased in the heavily weighted food basket on the back of lower tariffs on rice. This gives BSP the assurance that inflation is back in the bottle, and will stay on track over the coming months,” Sarah Tan, an economist from Moody’s Analytics, said.

Food inflation slowed to 1.4% in September from 4.2% in August and 10% a year ago.

Nomura Global Markets Research Chief ASEAN Economist Euben Paracuelles said that easing inflation will “allow the BSP to reduce further the restrictiveness of its monetary stance in a measured way.”

“The lower-than-expected September inflation supports the continuation of monetary easing,” Philippine National Bank economist Alvin Joseph A. Arogo added.

Maybank Investment Banking Group Senior Economist Zamros Bin Dzulkafli said that markets are anticipating inflation to stay within range in the next few months, due to the tariff cut on rice imports and India’s decision to lift the export ban on non-basmati white rice.

“Headline inflation is expected to remain within or even below target in the coming months due to favorable base effects and the improving outlook for food supply especially for rice,” Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said.

In the first nine months of the year, headline inflation averaged 3.4%. This was also the BSP’s full-year forecast.

BSP Governor Eli M. Remolona, Jr. earlier said that inflation is now on a “target-consistent path” which allows it to shift to a less restrictive policy stance.

“With the latest CPI and likelihood that lackluster demand has contributed to these benign inflation estimates, we believe the BSP has room to cut by another 25 bps at the next Monetary Board meeting,” Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., said.

“We believe there is scope for our consumer price index (CPI) given the food price slippage, and waning electricity rate hike effects, to absorb higher imported inflation due to recent oil price adjustments,” he added.

GRADUAL EASING
While the central bank will continue easing rates, analysts said this will likely be done in a gradual manner.

“However, the BSP may opt for a small cut, mindful of the impact of geopolitical tensions in the Middle East on the inflation outlook, the recent depreciation of the peso against the US dollar, and the repricing of Fed rate cut expectations. Additionally, BSP Governor Remolona alluded to favoring a gradual pace of rate cuts,” China Bank Research said.

The Monetary Board would likely go for 25-bp rate cuts over 50 bps, Mr. Remolona said earlier, as the latter would be more appropriate for a “hard-landing” scenario.

Mr. Neri said that the BSP is also likely to “opt for a modest 25-bp rate cut rather than a more aggressive 50-bp reduction.”

“While inflation has slowed to 1.9% in September, there are several factors that warrant a more cautious approach,” Mr. Neri added.

Chinabank Research also noted risks to the inflation outlook, citing rising global oil prices.

“Hence, the BSP may decide on a small cut in next week’s meeting to mitigate inflationary pressures, especially since higher oil prices could lead to second-order effects,” Chinabank Research said.

“The risks we see here are oil supply shocks (in the form of geopolitical blow-ups) and food-related supply disruptions (like weather) that will interrupt the BSP’s pace of cuts,” Mr. Ella added.

Mr. Asuncion said they revised its inflation forecast to 3.2% this year and 2.5% next year.

“Caveat to this benign inflation outlook is the Middle East event risk featuring the escalation of Israel-Iran hostilities that can sustain oil price volatility and renewed US dollar strength,” he added.

Mr. Neri also cited other risks that could lead to supply disruptions such as the La Niña weather event and a spike in African Swine Fever cases.

The latest bulletin from the state weather bureau showed that there is a 71% chance of La Niña forming in the September-November season and will likely persist until the first quarter next year.

“A gradual reduction in the policy rate would help the economy withstand the impact of these risks in case they materialize,” Mr. Neri added.

“Among the factors for this potential decision include Philippine inflation being well within target, resilient gross domestic product (GDP) growth, and expectations for the Fed to gradually reduce rates by 25 bps next month,” Security Bank Vice-President and Research Division Head Angelo B. Taningco said.

Ms. Tan said that the 50-bp rate cut by the Fed also gives room for the BSP to further lower policy rates.

The latest economic growth also paves the way for more calibrated rate reductions.

“Recent economic activity prints and emerging growth prospects also suggest that aggressive monetary easing isn’t necessary,” Mr. Neri said.

Philippine GDP expanded by 6.3% in the second quarter, the fastest in five quarters or since the 6.4% in the first quarter of 2023.

“Election-related spending, better weather and slower inflation in the coming months are likely to underpin more solid growth prints, reducing the need for massive rate cuts,” Mr. Neri added.

PESO
Meanwhile, Chinabank Research also noted that the BSP will take into consideration the recent peso depreciation.

“This month, the peso has depreciated back to the P57 level against the US dollar as markets pulled back expectations of another jumbo 50-bp cut by the Fed this year after a strong jobs report and as the conflict in the Middle East remains at risk of further escalation,” it said.

The local unit closed at P57.205 per dollar on Friday, strengthening by 15.5 centavos from its P57.36 finish on Thursday. Week on week, however, the peso sank by 91 centavos from its P56.295 finish on Oct. 4.

“Several Fed officials, including Chair Powell, have voiced their support for a more gradual pace of easing following their initial 50-bp reduction in September,” Chinabank Research said.

“A 25-bp cut by the BSP next week would keep the interest rate differential between the BSP’s and the Fed’s policy rate at 100 bps, thereby exerting less downward pressure on the peso,” it added.

Meanwhile, Oikonomia Advisory & Research, Inc. said they expect a 50-bp reduction this week as the “significant slowdown in inflation (gives) BSP a longer runway to cut rates.”

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort also sees a 50-bp reduction in order to match the Fed’s latest rate cut.

“By matching all Fed rate cuts in lockstep, to optimize monetary easing and support economic growth,” he said in an e-mail.

On the other hand,  Jonathan L. Ravelas, senior adviser at professional service firm Reyes Tacandong & Co., said that the BSP may keep rates steady and opt to cut by 25 bps later on in December, citing inflationary risks such as the recent reserve requirement ratio cut, election-related spending, and elevated fuel prices.

Mr. Ravelas said that easing must be implemented “slowly but surely” and flagged the possibility of October inflation breaching the 3% level.