Further easing seen in 2025 on tame inflation outlook
Inflation is expected to remain within target this year and next, prompting the policymaking Monetary Board on Thursday to reduce the Bangko Sentral ng Pilipinas’ Target Reverse Repurchase (RRP) Rate by another 25 basis points to 5.75 percent.
The interest rates on overnight deposit and lending facilities were also adjusted to 5.25 percent and 6.25 percent, respectively.
This is the third consecutive 25-basis point rate cut by the Monetary Board this year, totalling 75 basis points.
The “within-target inflation outlook and well-anchored inflation expectations continue to support the BSP’s shift toward less restrictive monetary policy,” Bangko Sentral Governor Eli M. Remolona, Jr. told reporters in a news conference.
“The monetary authority will continue to closely monitor the emerging upside risks to inflation, notably geopolitical factors,” Remolona said.
The risk-adjusted inflation forecast for 2025 was raised to 3.4 percent from 3.3 percent in the previous meeting, according to the Board.
For 2026, the risk-adjusted forecast is unchanged at 3.7 percent.
“Inflation expectations remain well-anchored,” Remolona said.
“The balance of risks to the inflation outlook continues to lean to the upside due, largely to potential upward adjustments in transport fares and electricity rates,” the BSP chief noted.
“The impact of lower import tariffs on rice remains the main downside risk to inflation,” he added.
The Monetary Board noted “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.”
Easing posture
Remolona said the Board will maintain its easing posture for next year, forecasting a rate cut ranging from 25 to 75 bps.
“At this stage, given our forecast and given the data, 100 basis points may be a bit much. I think we will maintain an easing posture, but not to the extent of cutting by 100 bps. We will have to see what the data said,” he added.
“One hundred basis points over 2025 would be too much, but zero would also be too little,” he stressed.
“Even with the 75 bps, we’re still somewhat on the tight side. That for us is a kind of insurance. The reason we’re cutting in baby steps is because we’re not absolutely sure about inflation. We still worry that inflation might start to rise again. By cutting in baby steps, at this point, we’re still somewhat tight. So that’s kind of insurance against possible increase in inflation,” Remolona said.
The typhoons that battered parts of the country in October and November caused supply pressures on key food items and logistics that pushed prices higher last month.
Data from the Philippine Statistics Authority showed that inflation in November moved at a faster rate of 2.5 percent, from 2.3 percent in October.
This brings the national average inflation rate to 3.2 percent in January to November, or in the mid-range of the government’s full-year target of 2 to 4 percent.
Remolona was earlier quoted as saying that they’re looking at a neutral rate of 5 percent.
Central banks use monetary policy to control the money in circulation, and achieve economic growth.
A tighter policy tends to increase interest rates and limits the outstanding money supply, slowing both the economic growth and inflation.
An easing cycle, meanwhile, stimulates economic activity through lower interest rates that encourages consumers to spend and borrow more money.
As expected
Economists expected yesterday’s move to ease interest rates.
Miguel Chanco, Pantheon Macro, said “the rate cut was made possible by the continued softness in inflation, which has returned steadily and manageably to the BSP’s target range.”
“The headline rate is currently only just above the 2 percent lower bound, and we reckon that it will largely continue to hug this level over the coming 12 months—barring an unexpected supply shock to prices—providing the board with more room to ease policy,” Chanco said.
“As things stand, we see a further 100 bps in easing, at least, in 2025. Our inflation forecasts see the annual average rate cooling to 2.4 percent next year from an estimated 3.2 percent in 2024, on more moderate food and restaurant and accommodation services inflation,” he added.
Lender Bank of the Philippine Islands noted the move was “in line with market expectations.”
“The central bank may have room to cut interest rates further in the first half of 2025, supported by a favorable inflation outlook. Barring any unforeseen supply shocks,” BPI Said in a statement.
“We continue to see the BSP reducing the RRP by a mere 50 basis points as a base case for 2025,” the central bank added.
