‘BSP has room for two more interest rate cuts’

By means of Luisa Maria Jacinta C. Jocson, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) may have room for two more rate cuts this year, Metropolitan Bank & Trust Co. said. (Metrobank).

“For now, we are sticking with our ‘2+1’ rate cut (two cuts with the possibility of a third cut) for 2024, with an easing to 75 basis points (bps) planned for early 2025.” Metrobank Chief Economist Nicholas Antonio T. Mapa said in a report.

“The main argument for lowering interest rates to 5% by mid-2025 lies in the growth prospectsFlation,” he added.

The Monetary Board last week cut the target reverse repurchase (RRP) rate by 25 basis points to 6.25%, from a 17-year high of 6.5%. This was the first time the exchange banks have lowered interest rates in almost four years.

BSP Governor Eli M. Remolona, Jr. had also raised the possibility of a 25 basis point cut in the fourth quarter. The remaining Monetary Board meetings this year are on October 17 and December 19.

Metrobank expects the central bank to implement a “modest” easing cycle.

“Given the BSP’s forecasts that inflation will remain within target through 2026, we believe that the BSP currently has the price stability target in hand,” Mr Mapa said.

The BSP expects inflation to average 3.4% this year, 3.1% in 2025 and 3.2% in 2026. This would continue throughout the yearFto remain within the central bank’s target of 2 to 4% until 2026.

For his part, GlobalSource Partners country analyst and former BSP deputy governor Diwa C. Guinigundo said the BSP’s inflation outlook supports further easing.

“This gives the BSP room to maneuver towards a less restrictive monetary policy, lower borrowing costs and boost credit and business activities,” he said in a Viber message.

“If nothing changes in the balance of risks between now and the BSP’s next two meetings for the rest of the year, there could be room for another rate cut and more in 2025.”

Mr Mapa noted that the Monetary Board’s decision to cut interest rates also took economic growth into account.

“This move suggests that interest rates are not at ‘normal’ levels and that the restrictive policy would take a toll on economic growth if kept at high levels for much longer,” he said.

Mr Remolona had previously said the previous policy rate of 6.5% was “tight”.

“Tight policy rates may have been necessary when inflation was well above target, but with inflation on the decline, it seemed that tight policy was no longer the right recipe for a growing economy,” Mapa said.

The Philippine economy grew 6.3% in the second quarter, faster than 5.8% in the previous quarter and 4.3% a year ago. On a quarterly seasonally adjusted basis, gross domestic product (GDP) grew by 0.5%, a slowdown from the previous quarter. 1.1% in the first quarter.

“Barring any supply-side shocks, the BSP appears to have more than enough room to achieve a ‘soft take’Ff’ for the Philippine investment sector, which for the most part has been operating at a very subdued pace,” Mr. Mapa said.

“The latest GDP growth figures plus the BSP’s own forecasts indicate growth will remain below 6% this year and the following suggest the BSP has room to take its foot off the brake and step on the accelerator at a ‘measured pace’ to go.”

Meanwhile, Mr Mapa said the BSP could continue its easing cycle once the Fed starts cutting rates.

“If inflation continues to behave well, the Fed makes three rate cuts and growth remains subdued, we could see BSP rates fall another 50 basis points before the end of the year.”

However, Mr Guinigundo said the BSP should still be wary of the Fed’s actions.

“I would prefer the BSP to move to a less restrictive monetary policy after the expected easing by the US Fed,” he said.

“This would help limit the risk of capital outflows if the interest rate differential were to move in favor of dollar-denominated assets. Additional price pressure could be caused by a weak peso.”

The focus this week will be on Fed Chairman Jerome H. Powell’s speech in Jackson Hole, as investors look for signals on whether the Fed will initiate a 25 bp or 50 bp rate cut in September.

“I continue to maintain that patience remains relevant in the future monetary policy discussion as the real sector remains robust and the labor market generally firm,” Mr Guinigundo said.

“The tight monetary policy has managed to stabilize inflation without loosening the anchors of economic growth,” he added.