After the economy failed to hit the government’s growth target last year, economists said they see the need for further cuts in the central bank’s key rates to stimulate production this year.
The Philippine Statistics Authority (PSA) yesterday announced that gross domestic product (GDP) for full year 2024 expanded at 5.6 percent, falling short of the government’s 6 to 6.5 percent growth target.
Economic growth was weighed down by weaker consumption and weather disruptions that squeezed farm output, the numbers showed.
Nicholas Mapa, Metrobank’s chief economist, said the growth rate suggests BSP should consider cutting rates further to support the growth momentum, with inflation forecasts staying within target.
“Household spending posted the slowest expansion since 2010, outside COVID. Meanwhile, elevated borrowing costs likely weighed on investment activity, with investment in durable equipment turning negative for the whole year,” Mapa said.
The policymaking Monetary Board has reduced the key rates of the BSP three times, totaling 75 basis points, last year.
Analysts are keeping a close watch on signals that will come from monetary officials who are expected to meet and decide on the key policy rates on Feb 13, 2025.
During the December 2024 meeting, Eli M. Remolona, BSP governor and Monetary Board chief, said the risk-adjusted inflation forecast for 2025 has risen slightly to 3.4 percent from 3.3 percent in the previous meeting. For 2026, the risk-adjusted forecast is unchanged at 3.7 percent.
Remolona said that “domestic demand is likely to remain firm but subdued with private domestic spending expected to be supported by easing inflation and improving labor market conditions.”
He added that the Monetary Board will maintain its easing posture for this year, giving a cumulative rate cut ranging from 25 to 75 bps.
“The softer GDP data for the 2nd straight quarter would further justify local policy rate cuts as early as the next rate-setting meeting on February 13, 2025, and would also match future Fed rate cuts,” Michael Ricafort, RCBC chief economist, said.
Ricafort said growth in the fourth quarter at 5.2 percent is the “slowest in 1.5 years or since 2Q 2023.”
“(This came) after the series of typhoons that led to some damage and reduced agricultural output and disrupted many business activities, such as services, which account for 62 percent of the economy, and some tourism activities,” Ricafort said.
Ricafort sees inflation ranging from 3.0 to 3.5 percent this year, which he expects to allow the BSP to further reduce the key rates between 5 and 5.25 percent.
“Inflation for December was the fastest in four months but still among the slowest in more than four years, largely due to higher transport and utility prices, also partly due to the seasonal increase in demand during the Christmas and New Year holiday season,” Ricafort said.
“Relatively benign inflation at 2 percent levels is still possible up to early 2025, within the BSP’s inflation target of 2 percent to 4 percent, thereby could justify future local policy rate cuts,” he added.
Sunny Liu, England-based Oxford Economics’ economist for Macro Forecasting & Analysis, said they expect economic growth to gain some momentum in 2025.
“With more accommodative monetary policy – we expect three 25 basis points rate cuts in the first three quarters–and likely well-contained inflation, consumer spending and investment are both likely to strengthen,” Liu said.
However, Liu said uncertainty around US tariff policies, tighter-than-expected financial conditions and rising geopolitical risks, present some headwinds.
“Persistent weakness in export of goods and extreme weather conditions continued weighing on growth in Q4. Adverse weather continued to weigh on Q4 growth: six typhoons between October and November devastated crops, caused delays in constructions and disrupted the tourism sector,” Liu said.
Gareth Leather, senior Asia economist at England-based Capital Economics, said interest rate cuts will support growth in 2025.
“Strong and steady growth supports our view that the easing cycle will remain gradual over the coming months. The BSP cut rates by 75 bps last year and we are expecting a further 100 bps of cuts this year,” Leather said.
“Consumption growth should accelerate, helped by a combination of lower inflation and interest rate cuts. Inflation has fallen from a peak of 8.7 percent in 2023 to 2.9 percent last month,” Leather said.
“GDP growth in the Philippines picked up slightly in the final quarter of last year, and we expect decent growth in 2025 as interest rate cuts help offset the drag from weaker exports and tighter fiscal policy. Overall, we think the economy will grow by 6.0 percent this year,” he added.
Earlier, Emilio S. Neri, Jr., lead economist of BPI, said the GDP data may influence the timing of the rate cuts of the BSP.
“So far we expect two 25 basis points reductions this year as uncertainties abroad may limit the extent of monetary easing,” Neri said, adding that a slower pace of rate cuts from the Federal Reserve is “very likely as the policies of the new US administration may stoke inflation.
“Aggressive rate cuts from the BSP in this scenario may exert pressure on the peso,” Neri said.
He said inflation is likely to stay within the target of the BSP, “assuming no unexpected supply shocks.
“While risks such as La Niña and global trade barriers could exert upward pressure on prices, these may be offset by stable commodity prices amid China’s economic slowdown, improving rice supply, and expanded US oil production.
For 2025, Neri said they expect the economy to grow by 6.3 percent “as election spending could provide a boost to growth.
Aris Dacanay, HSBC economist for the Asean region, expects the central bank to cut its policy rate gradually, by 25 basis points in each quarter until the policy rate reaches 5 percent by the third quarter of this year.
“We think household consumption in the Philippines should return, bit by bit, to its regular levels, bringing overall GDP growth back to the range of 6 percent or more,” Dacanay earlier said.
“To optimize one’s borrowing costs, households may be waiting for the central bank’s easing cycle to end before eventually deciding whether to borrow money or not. “Nevertheless, with the consumer outlook looking better, growth in the Philippines should improve,” Dacanay said.