The utilities-led uptick in inflation last December is unlikely to deter the Bangko Sentral ng Pilipinas from further cutting interest rates this year, analysts said on Wednesday.
Prices of major commodities and utilities continued to climb for the third month in December as inflation hit 2.9 percent, yet within the 2 percent to 4 percent target range, as reported by the Philippine Statistics Authority on Tuesday.
The inflation numbers last month brought the full-year average to 3.2 percent, the slowest since 2021, landing at the mid-range of the government’s target.
Inflation is expected to stay within the target range this year.
With the current monetary policy rate “still relatively high and given the time lag in monetary policy,” the central bank is likely to continue with its gradual 25-basis point rate cuts, totalling 75 basis points up to the third quarter of 2025, said Nalin Chutchotitham, Citi economist for the Philippines.
The policymaking Monetary Board lowered the central bank’s Reverse Repurchase (RRP) Rate by another 25 basis points to 5.75 percent last December, as inflation
moved within the 2 percent to 4 percent range.
Interest rates on the overnight deposit and lending facilities were accordingly adjusted to 5.25 percent and 6.25 percent, respectively.
It was the third consecutive 25-basis point rate cut by the Monetary Board that eased the yield rated by a total of 75 basis points.
“Headline inflation rose more than expected in December but mainly due to energy prices, while inflation in other categories were little changed.,” Chutchotitham noted.
“While there are still some upside risks stemming from scheduled increases in electricity charges (for the first quarter of 2025), we continue to expect 2025 inflation to be well within policy target at 3.1 percent,” he added.
The country’s inflation numbers last year were not broad-based despite a higher core inflation, which rose from 2.5 percent in November to 2.8 percent.
“(This) reflects increases in food inflation. Producer price and wholesale price inflation rates have likely bottomed out but remained relatively stable,” Chutchotitham said.
On the back of planned increases in electricity rates during the first half of 2025, Citi has revised its inflation forecast to 3.1 percent from 2.8 percent, with a view to further revisions for the remainder of the year — although these adjustments might be offset in part by lower oil prices.
Citi also adjusted its inflation forecast to 3.2 percent from 3.0 percent for 2026, Chutchotitham said.
He expects the Bangko Sentral to lower policy rates by another 25 basis points to 5.50 percent when the Monetary Board meets in February.
“With 2025 inflation expected to be well within target, absent large shocks, the expected real policy rate still appears fairly tight by historical standard,” he added.
Despite expectations of an economic growth of 6.0 percent this year — close to the potential level — concerns for a demand-driven inflation remain manageable, the Citi analyst said.
Citi has also adjusted its expectations on yield rate cuts for June and August.
These developments would give the central bank time to check the pulse of domestic demand, in light of the upcoming general elections in May, as well as external factors that include the US Federal Reserve Bank’s rate cuts.
“We expect 50 basis points more, likely to follow in 2026, if inflation stays close to the target mid-point, thus bringing real policy rate closer to historical level and continuing to support economic growth,” Chutchotitham said.
Separately, global financial services group Nomura noted that the Bangko Sentral “remained relatively dovish” on heels of Tuesday’s inflation data.
While BSP retained its assessment that inflation risks lean to the upside, it said on balance, the within-target inflation outlook and well-anchored inflation expectations continue to support BSP’s shift toward less restrictive monetary policy,” Nomura economists Euben Paracuelles and Nabila Aman said.
The economists also see the central bank’s emphasis toward a measured approach to monetary easing, consistent with Nomura’s view that despite the peso’s weakness, the Bangko Sentral will likely continue to cut rates and decouple from the Fed and regional peers.
Such a position is based on the assessment of well-anchored inflation expectations and a limited FX pass-through, Paracuelles and Amani noted.
“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, noting that the factors that drove headline inflation in December were likely temporary.
“Importantly, the output gap remains negative and we continue to assume that the impact of lower rice import tariffs on food inflation will continue to play out in coming months. More supply-side measures of the government and our oil price assumptions also add to our view that inflation pressures will be well contained,” the Nomura economists added.
Nomura has also taken the position that the Bangko Sentral will cut interest rates by another 75 basis points to 5.0 percent 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.
On another note, lender RCBC expects inflation to settle within 3.0 percent to 3.5 percent this year, which will allow the central bank to further reduce policy rates to 5.00 percent to 5.25 percent.
“Inflation for December was the fastest in 4 months but still among the slowest in more than 4 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,” said Michael Ricafort, RCBC chief economist.
He expects inflation to stay relatively benign at 2 percent early this year, within the central bank’s target of 2 percent to 4 percent, that will justify policy rate cuts.
There was never an instance when the Banglo Sentral’s policy rate, now at 5.75 percent, dropped lower than the Fed Funds Rate, now at 4.50 percent, Ricafort noted.
Relatively higher policy rates led to some net increase in borrowing costs since 2022, he said.
That could lead to lower earnings and valuations, and place a drag on economic growth as an unintended consequence in the quest to fight off inflationary pressures, Ricafort added.
