By Luisa Maria Jacinta C. Jocson, A reporter
BANGKO SENTRAL ng Pilipinas (BSP) is expected to will continue its cycle of rate cuts in its final policy review of the year on Thursday, analysts said.
A BusinessWorld a survey conducted last week showed that 13 out of 16 analysts expect the Monetary Board to reduce the target reverse repurchase (RRP) rate by 25 basis points (bps) at its meeting on Dec. 19.
If possible, this will bring the standard rate to 5.75% from 6%.
This will also mark the third consecutive meeting that the central bank will cut rates since it began its easing cycle in August with a 25-bp cut. It cut borrowing costs by another 25 bps in October.
On the other hand, one analyst expects the central bank to cut by 50 bps, while two analysts see the BSP keeping policy rates unchanged on Thursday.
“We now expect the BSP to cut the RRP rate by 25 bps in their Dec. 19 policy meeting,” Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said.
“While a temporary suspension (or jump) is still possible, recent economic data and external developments are consistent with monetary easing,” he added.
Analysts pointed out that expectations for further rate cuts to lower inflation and weaker-than-expected gross domestic product (GDP) data for the third quarter.
“My forecast is that the BSP will decrease by 25 bps to 5.75% next week. The reasons for this decision are the GDP growth and the inflation situation,” said Security Bank Vice President and Head of Research Angelo B. Taningco.
“We expect the BSP to cut the policy rate by 25 bps to 5.75% with the latest inflation data still operating well within its target and the outlook continues to be negative,” said Nomura Global Markets Research analyst Euben Paracuelles.
Inflation stood at 2.5% in November, bringing the 11-month average to 3.2%. This is still within BSP’s target band of 2-4%.
The central bank expects inflation to fall to 3.1% this year.
“We think it is ripe for the BSP to cut another 25 bps this December. Inflation staying within the BSP’s target is one of the main reasons why we think the BSP will consider tapering,” said Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc..
Mr. Neri said that the inflation situation next year is consistent with the case of lowering the rate.
Next year, the BSP expects inflation to average 3.2%, still within target.
“The latest inflation figures were at the lower end of the BSP’s target range of 2-4%, and we estimate that inflation will remain within the target going forward,” said Chinabank Research.
SLOW GROWTH
A slower-than-expected economic outcome could create more relief, analysts said.
Chinabank Research said the BSP may be encouraged to continue easing policy to “provide more stimulus to the economy, especially on the investment side.”
“Members will probably be persuaded to be more relaxed after the weaker-than-expected GDP print in the third quarter, which we rightly predicted would disappoint market expectations,” said Pantheon Emerging Asia Economist Miguel Chanco.
The Philippine economy shrank sharply to 5.2% in the third quarter from 6.4% in the second quarter and 6% last year.
Economic growth reached 5.8% in the first nine months, below the government’s revised target of 6-6.5% for the year.
“The latest Philippine economic activity data fell short of government and analyst expectations,” said Mr. Neri.
“Therefore, although many other things have dragged down the economic performance since the epidemic, the pressure on the governmentf“The authority to reduce prices continues to be built, especially before the mid-term elections,” he added.
Expectations of a further tapering cycle by the US Federal Reserve will also create more room for a rate cut by the BSP.
“If the US Fed does not deliver its own 25 bps (cut), we believe the BSP will seriously consider cutting key interest rates,” said Mr. Asuncion.
Traders betting on a cut rate at the US central bank’s December 17-18 meeting are about 97%, according to CME’s FedWatch Tool, Reuters reported.
“The latest US inflation report strengthened expectations for a 25-bp rate cut from the Fed (this) per week,” said Chinabank Research.
“If realized, this will allow the BSP to lower rates again without adding downward pressure on the peso, as the interest rate differential with the Fed will remain comfortable at 125 bps,” it added.
WEAK PESO
The peso may also be a consideration in the central bank’s monetary policy decision.
“Regarding external factors, the stable performance of the peso against the US dollar in the past few weeks may reduce concerns about the transmission of exchange rate volatility to general price behavior,” said Mr. Neri.
Economist for Oikonomia Advisory & Research, Inc. Reinielle Matt Erece said the BSP will opt for a 25 bps hike as “anything deeper could cause the peso to depreciate quickly against the dollar especially if the Fed maintains its policy rate.”
The peso closed at P58.47 per dollar on Friday, weakening by 23 cents from its close of P58.24 on Thursday.
Last month, the peso fell to a record low of P59-per-dollar twice.
Moody’s Analytics economist Sarah Tan said a weak peso could delay the BSP’s rate-cutting cycle.
“That being said, policy easing is still possible as it will support private consumption, which is a driver of economic growth,” he added.
Meanwhile, Jonathan L. Ravelas, senior consultant at professional services firm Reyes Tacandong & Co., said there is room for the central bank to cut rates by 50 bps.
“With inflation at 2.5% in November, year-to-date at 3.2%, within the BSP’s target of 2-4%, they can cut by 50 bps to support growth following the slow growth in the third quarter,” he said.
“This will help ensure growth of at least 6.3%-6.5%. The fear of currency depreciation due to the reduction will improve the country’s competitiveness which will boost tourism, manufacturing support, outsourcing companies and remittances from Filipino workers overseas,” he added.
Mr. Ravelas warned that “it may be difficult to lower rates next year as US President-elect Donald J. Trump beginsfsnow.”
On the other hand, some analysts see the possibility of a policy on Thursday.
Sir Percival K. Peña-Reyes, director of the Ateneo de Manila University Center for Economic Research and Development, said the BSP will likely stop its easing cycle and keep its policy rate unchanged.
“I predict that the Monetary Board will maintain its current policy level. This is due to several factors such as the fluctuation of the price of oil, electricity and the decreasing value of the local currency compared to the dollar,” said Emmanuel J. Lopez, a lecturer at the University of Santo Tomas Graduate School.
“Despite inflation, consumer products remain volatile in anticipation of the holidays, when demand drives up prices,” he added.
2025 VISION
Meanwhile, analysts expect the BSP to continue cutting rates next year.
“By 2025, we’re forecasting a full 100-bp cut and it will probably be distributed once a quarter,” said Patrick M. Ella, chief economist at Sun Life Investment Management and Trust Corp.
In a report, Capital Economics said it expects a rate cut of 100 bps in 2025 as growth is likely to moderate and inflation appears to remain low. This will bring the policy rate to 4.75% by the end of 2025.
This is in line with the signals of BSP Governor Eli M. Remolona, Jr., who said the Monetary Board could bring rate cuts in the 100-bp range next year.
However, he said that the BSP may not hold meetings every quarter or every quarter.
“The BSP may cut its rates further in 2025, as local economic data may remain supportive,” said Mr. Neri.
On the other hand, he said external shocks “could reduce the rate of devaluation.”
“If President Donald Trump delivers on his campaign promises of higher taxes and deportations, a drop in US inflation could translate into a US rate cut, if not a policy reversal,” said Mr. Neri.
Mr. Ella said there is a “slight possibility” the BSP will stop the rate cut if the Fed also decides to stop its policy easing.
“But, at the moment, we see this as a low probability BSP event, maybe a 10% chance of happening but this should change if there are significant developments and iffBSP’s language/communication shows otherwise,” he added.
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