‘Limited room for easing’ now seen
Analysts from two global lenders changed their outlook on the Monetary Board’s policy stance after the Bangko Sentral ng Pilipinas (BSP) doused market expectations for a 25 basis points key interest rate cut in its meeting last week.
BSP Governor and Monetary Board Head Eli Remolona announced on Thusday the board has decided to keep the BSP’s Target Reverse Repurchase (RRP) Rate unchanged at 5.75 percent, citing economic uncertainty and global trade risks.
Interest rates on overnight deposit and lending facilities were also kept steady at 5.25 percent and 6.25 percent, respectively.
In a report over the weekend, Citi’s Nalin Chutchotitham, the lender’s Philippine-centric economist, said they now expect the next BSP rate cuts to be implemented in April, August and December, instead of February, June and August as stated in its previous outlook.
Citi said its latest stance is now “dependent on the inflation outcome and global developments.”
“The BSP deemed that the precautionary pause (along its) easing path was in response to heightened global economic uncertainties, which deserve further assessment, as well as ongoing inflationary pressures from utility prices and wage hikes while maintaining forward guidance of a 50 bps rate cut in 2025, and a further 200 bps on RRR,” Chutchotitham said.
Based on the above considerations, Citi said it has revised its expectations for the next 25 bps rate cuts to happen in April, and two more—in August and December.
“While we think the BSP could afford to cut a total of 75 bps this year, considering a high real policy rate and positive interest rate differential with the Fed, Governor Remolona’s more cautious forward guidance of a total of 50 bps cut this year means a third cut still hinges on several factors apart from domestic demand and inflation,” Chutchotitham said.
These factors will include the Fed’s rate cut timing and the US trade policy actions that would have implications on the US dollar and how prices of goods and services would respond to shifts in foreign exchange rates internationally.
Chutchotitham emphasized how Remolona specified the BSP’s plan to further reduce banks’ reserve requirement ratio (RRR) by 200 bp, to 5 percent for large banks, and that it could come “sooner than the middle of the year.”
“Potentially, such a move would help support economic activity while having limited impact on the exchange rate vs. the policy rate, “Citi’s economist said.
“We also think that the recent RRR cut of 200 bps in October 2024 has likely provided an additional loosening effect on financial conditions, supporting credit growth and overall domestic demand at the margin,” Chutchotitham added.
Even if the BSP made it clear that the reserve requirement ratio was more of a technical adjustment to reduce structural distortion in the financial system, and not a substitute for policy rate, which is a cyclical policy tool, Citi’s position remains firm that the move was intended to let more money flow into the financial system and stimulate growth at the very least.
A dovish hold
On the other hand, while HSBC had expected a lower RRR, the lender went back to recalibrate and revise its forecast for a 25 bps policy rate cut to June 2025 from February, followed by two more 25 bps cuts until the key rates settle at 5 percent later this year.
“Despite the fourth quarter 2024 growth undershooting, the BSP surprised the market by delivering a dovish hold,” said Aris Dacanay, HSBC’s economist for Asean.
“Keeping the policy rate at 5.75 percent creates flexibility in monetary policy amidst uncertainties in global trade policies,” Dacanay added in a separate report released over the weekend.
He maintained the Monetary Board’s move was a big disappointment and contrary to market expectations. He cited 28 of the 29 economists surveyed by Bloomberg, including HSBC, expected a 25 bps policy rate cut this February “The central bank’s rationale of pausing its easing cycle was clear: it wanted monetary policy to be flexible amidst the uncertainties in global trade. The BSP isn’t alone here,”Dacanay said.
“Achieving flexibility was also the same priority shared by the Bank of Thailand during its last rate-setting meeting,” he added.
HSBC’s position on this matter is that flexibility can be an asset if the Federal Reserve goes for “a sudden re-pricing of Fed rates,” Dacanay said.
“Pausing the easing cycle would lend support to the peso and mitigate the risk of FX-induced inflation if, say, US trade policies lead to renewed USD strength,” he added.
At this point HSBC thinks the BSP’s decision to keep policy rates steady implies that FX volatility remains its pressing concern despite the economy underperforming in the fourth quarter 2024.
Mitigating risks
Meanwhile, Jun Neri, lead economist for lender Bank of the Philippine Islands (BPI), said the dovish easing stance taken by the BSP’s Monetary Board last week was “still in line with our outlook for 2025,” even if BPI also eyed a 25 bps rate cut.
“As we noted previously, we see limited room for monetary easing this year. A narrowing interest rate differential could lead to capital outflows, while the country’s current account deficit heightens the vulnerability to external shocks. Keeping interest rates steady might be needed to mitigate these risks,” Neri said.
BPI remains positive that 2025 will close with the policy rate at 5.25 percent,” unless the outlook for domestic inflation continues to be positive.
Bangko Sentral chief Remolona also clarified why the BSP decides to keep rates steady. “The Monetary Board did not want to put itself in a situation where it would have to reverse itself.”
Global uncertainty was a major factor for the decision, and that needs more time to think about and come up with a “deeper analysis” of the situation.
“We’re hedging so that we don’t find ourselves in a situation where we have to reverse . We want to stay on an easing trajectory,” he said in a separate interview with an international news network over the weekend. The central bank shared a digital clip of the interview with reporters.
“It was a complicated decision. We’re going to be comparing notes with other central banks, but we should have a better understanding of what’s going on by the time of the next policy meeting,” Remolona added.
The Monetary Board is scheduled to hold its next policy meeting on April 3.
