Analysts see factors behind BSP 50bps rate cut for 2025; agree with 2.5-3.3% inflation forecast 

- Advertisement -

Analysts interviewed by Malaya Business Insight agreed with the 2.5  to 3.3 percent estimates for January inflation by the Bangko Sentral ng Pilipinas (BSP), saying they also understand the factors that limit the extent of rate cuts considered by the BSP for this year to 50 basis points.

The January inflation report is due for release on February 5.

BSP Governor Eli Remolona on Friday said upward  inflationary pressures stemmed from increases in the prices of petroleum prioducts, typhoon-ravaged food items, as well as higher water rates and sin taxes

- Advertisement -

Prices of major commodities and utilities continued to climb for the third month in December, pushing inflation  higher to 2.9 percent, the PSA said last month.

December’s inflation numbers brought the full-year 2024 average to 3.2 percent, the slowest since 2021, and at the mid-range of the government’s target range for 2024 at between 2 and 4 percent.

The analysts said an uptick was likely.

 Emilio Neri, BPI lead economist, said the consumer price index likely rose 3 percent in January, gaining pace from 2.9 percent in December.

“Food inflation has been steady largely due to the month-on-month decline in rice prices, with favorable supply prospects following the end of El Nino,” Neri said in a statement sent  via email.

Inflation in other items, such as transport and utilities, has been manageable, also given the recent behavior of global commodity prices, driven by the economic slowdown in major economies like China, Neri said.

“The impact of currency movements has been minimal so far as the peso (vesus the US dollar) continues to trade at the 58 level,” he added.

Neri saw the January inflation as crucial, saying this might influence the policy decision of the BSP in its next meeting on February 13.  

“A lower-than-expected figure may give them another reason to cut interest rates, in addition to the disappointing GDP print,” Neri said.

“However, we continue to see risks that could limit the BSP’s rate cuts to just 50 bps this year. The country’s current account deficit remains substantial, making the peso more vulnerable to external forces such as the monetary policy of the Federal Reserve and the policies enacted by President Trump,” Neri said.

“Aggressive rate cuts from the BSP may exert pressure on the peso, which may contribute to inflation expectations,” he said.

The policymaking 

Monetary Board last December has reduced the BSP’s Target Reverse Repurchase (RRP) Rate by another 25 basis points to 5.75 percent.  This was the third consecutive 25bps-rate cut made by the Monetary Board for 2024, totaling 75 bps.

RCBC chief economist Michael Ricafort, in a Viber message, said inflation likely settled lower at 2.6 percent in January as demand slowed after the seasonal increase during the Christmas and New Year holiday season.

“Provided no escalation of geopolitical risks and its potential effects on world oil prices and also provided no La Nina damage that tends to increase food prices, headline inflation could still be well within the 2 percent-4 percent BSP inflation target, possibly at 2 percent levels up to early 2025,” Ricafort said.

Ricafort said lower inflation and the softer GDP data would further support local policy rate cuts as early as the next BSP rate-setting meeting on February 13 and could also support recent hints of a possible cut in large banks’ reserve requirement ratio to 5 percent from the current 7 percent.

He said further policy rate cuts in the coming months could be possible if supported by a benign inflation as seen recently amid higher base effects.

“Still relatively higher local policy rates led to some net increase in borrowing costs since 2022 that could lead to lower earnings and valuations, as well as could be a drag on economic growth as an unintended consequence in the quest to fight off inflationary pressures,” Ricafort said.

- Advertisement -spot_img

Meanwhile, Nalin Chutchotitham, Citi economist for the Philippines and Thailand, said in a report sent yesterday that slower growth in 2024 supports continued monetary easing by the BSP.

“We think the weaker-than-expected Q4’24 GDP growth also reflected the lagged impact of tight monetary policy stance over the two years, aside from weather-related reasons on agriculture output,” Chutchotitham said.

Given the slightly slower-than-expected growth in 2024, Chutchotitham said they revised downward their 2025 GDP forecast slightly to 5.9 percent from 6.0 percent earlier.  

“In any case, the seasonally-adjusted GDP continued to pick up pace for the second straight quarter, while recent activity data (bank loans, unemployment, income remittances) continue to suggest that domestic demand would remain well-supported in 2025,” Chutchotitham said.

“We continue to expect the BSP to deliver a 25 bps policy rate cut on 13 February, to 5.50 percent.  We expect the BSP to cut again in June and August, skipping April,” he added.

The skip, he said, was partly to ascertain a few outcomes, which include the potential increase of US tariffs and possible impact on global trade and the peso, the Fed’s rate-cut decisions, the Philippines’ mid-term election campaigning’s potential positive impact on domestic demand.

“However, we continue to see risks that could limit the BSP’s rate cuts to just 50 bps this year. The country’s current account deficit remains substantial, making the peso more vulnerable to external forces such as the monetary policy of the Federal Reserve and the policies enacted by President Trump. Aggressive rate cuts from the BSP may exert pressure on the peso, which may contribute to inflation expectations,” Chutchotitham said.

Earlier, Euben Paracuelles and Nabila Amani of global financial services group Nomura said after the  release of the 2024 inflation data, BSP “remained relatively dovish.”

“We maintain our forecast for CPI inflation to average 2.7 percent in 2025, which is lower than the 3.2 percent in 2024, and below BSP’s baseline forecast of 3.3 percent,” they said in a joint note, adding that the factors pushing up headline inflation in December are likely to be temporary.

“We, therefore, still expect an additional 75 bps in cuts to 5.0 percent, delivered in the first three meetings of the year starting in February. We still have one more CPI print before the next BSP meeting, and unless we see another sharp pickup in headline inflation to well above 3 percent, we see no reason for BSP to pause,” Paracuelles and Amani said.

Author

- Advertisement -

Share post: