Analysts interviewed by Malaya Business Insight expect policy rate cuts by the Bangko Sentral ng Pilipinas (BSP) in the days and months ahead.
Jonathan Ravelas, BDO chief market strategist, said last month’s inflation figure turned out to be higher than the 2.5 percent he had expected, yet, given the low range of the movement in prices during the month, he said he still sees room for reductions in the key BSP rates.
“Though higher than expected, it still gives BSP enough leeway to cut rates even by 50 bps to help spur economic growth,” Ravelas said in a Viber message.
HSBC Asean Economist Aris Dacanay said January’s rate was slightly above his team’s expectations. HSBC had forecast 2.7 percent for last month.
“A bit of a surprise, but nothing that would dislodge market expectations on monetary policy, in our view,” Dacanay said.
“Despite rice price index finally falling, headline inflation remained sticky, with vegetable (prices) rising 21 percent. This just goes to show that the impact of previous supply-shocks, such as typhoons, continue to linger. But the impact should be temporary once supply conditions become more favorable. Here, rice prices will be a key (factor) to monitor,” Dacanay said in a statement, adding, “risks to inflation are tilted to the downside.”
“Regardless of the inflation, we continue to expect the BSP to cut its policy rate next week by 25 bps to 5.50 percent. Inflation is still within the lower-bound range of the BSP’s 2-4 percent target band, which gives the central bank room to maneuver and slightly shift its focus on growth,” Dacanay said.
He added that a rate cut would lend some momentum to domestic demand, with credit growth still well below pre-pandemic levels. Dacanay also sees further monetary easing supported by the deceleration of core inflation.
Michael Ricafort, RCBC economist, said January’s 2.9 percent inflation is “still considered relatively benign or within the BSP inflation target of 2 percent to 4 percent, which could still justify future local policy rate cuts that could match future (US) Fed rate cuts.”
The January rate, he said, is among the fastest in five months, or since August 2024, but still among the slowest in four years, or since October 2020.
“Further local policy rate cuts for the coming months could be possible, as fundamentally supported by a relatively benign inflation trend as seen recently amid higher base effects,” Ricafort said in a Viber message.
The “latest inflation rate of 2.9 percent in January 2025 is again well within the central bank’s target range of 2 percent-4 percent and would further support the economic recovery narrative, amid the faster growth in GDP compared to slower net increase in the prices especially into 2025 and beyond, barring geopolitical risks,” he added.
Emilio Neri, BPI lead economist, said the possibility of a BSP rate cut next week “has increased, with inflation providing room for easing.”
Key factors to consider
“Weak GDP data could push the central bank to prioritize growth, as Gov. Eli Remolona recently noted that the country has a negative output gap and is operating below capacity. He also said that a rate cut is on the table in the upcoming Monetary Board meeting, a signal that often precedes a policy action,” Neri said in a statement.
A key consideration, Neri said, is the potential trade-off between monetary easing and currency stability.
“The peso may come under pressure if the (US) Federal Reserve leaves interest rates unchanged for longer. The BSP appears to be open to dollar moving higher as long as inflation remains within target. A weaker peso could also provide a boost to the economy by improving the peso purchasing power of exporters and OFW households,” Neri said.
“Nevertheless, we believe the scope for cuts this year remains limited. Cutting the policy rate aggressively could amplify this vulnerability and exert unmanageable pressure on the peso. We therefore continue to expect a total of 50 bps in RRP rate cuts this year, which will bring the policy rate to 5.25 percent by year-end,” he added.
Remolona said the BSP will continue to closely monitor developments ahead and risks to the inflation outlook.
“This will be discussed in the upcoming monetary policy meeting on February 13. Looking ahead, the Monetary Board will maintain a measured approach to monetary policy easing to ensure price stability conducive to sustainable economic growth and employment,” Remolona said.
Remolona over the weekend said a 25-basis point cut in key rates might be imposed in the first half of the year and another 25 bps in the second half as part of the central bank’s role of stimulating growth.