Inflation could decline further in the fourth quarter

By means of Luisa Maria Jacinta C. Jocson, Reporter

PHILIPPINE headlineFInflation could fall to less than 2% in the EU fourth quarter of this year, Nomura Global Markets Research writes this in a report.

Nomura said it is “drawing a trajectory where the headline comes in.”FInflation falls to less than 2% in the fourth quarter of 2024, a substantial decline from 4.4% in July, and continues to fluctuate within a similar range for most countries thereafter. Ffirst half of 2025.”

Nomura said inflation will stabilize at 2.8% this year and decline further to 2.3% in 2025.

These forecasts are lower than the Bangko Sentral ng Pilipinas (BSP) own projections. The central bank expects inflation to average 3.4% in 2024 and 3.1% next year.

Nomura said it’s inFThe outlook for the economy is mainly determined by the recent rate reductionFfs on rice imports.

In June, President Ferdinand R. Marcos Jr. issues an executive order to lower the tariffFf on rice imports from 35% to 15% until 2028 to dampen rice prices.

Rice in itFling, which accounts for almost half of the total inFInterest rates fell from 22.5% a month ago to 20.9% in July. This was the fourth month in a row with slower riceFlat.

Nomura said the BSP will further cut rates for the rest of this year.

“Overall, we reiterate our forecasts that BSP will cut by 25 basis points (bps) each in the last two meetings of the year, i.e. in October and December,” the report said.

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%.

BSP Governor Eli M. Remolona, ​​Jr. said the central bank could make another 25 basis point cut in the fourth quarter.

“In addition, we also expect BSP to cut back on the Ffirst three meetings in 2025, before going on hiatus from there. This would bring the RRP rate to 5% by May 2025, for a total of 150 basis points of cuts in this cycle,” the report said.

Nomura said the BSP’s next policy decisions will be largely determined by the in-Ftrajectory in the coming months.

“If inflation remains on a downward path, BSP may look to further remove restrictiveness in monetary policy to support a recovery in domestic demand and overall growth.”

“Additionally, we continue to think that the Fed’s loosening will play a role, and that the easing cycle underway from September, as our US team expects, should support the BSP’s successive rate cuts in the coming months,” it added.

The US Federal Reserve appears to be on track for an interest rate cut in September, after a “vast majority” of offThe minutes of the US central bank’s July 30-31 meeting suggested such action was likely, icials reported.

The minutes, released on Wednesday, showed that some policymakers at last month’s meeting might even have been willing to cut borrowing costs.

The policy-setting Federal Open Market Committee left its benchmark interest rate unchanged at between 5.25% and 5.5% on July 31, but opened the door to a cut at its meeting on September 17 and 18.

Financial markets expect the September meeting to kick off the Fed’s policy easing, with as much as a full percentage point of rate cuts expected by the end of this year.

PESO IMPACT
Meanwhile, Bank of America (BofA) Global Research pointed out the recent impact of the BSP’s policy easing on the peso in a separate report.

“The Philippine peso has appreciated against the US dollar, but less so compared to peers in the region, taking advantage of the BSP’s rate cut at the last meeting and mild guidance for another possible cut this year” , the report said.

BofA now expects the peso to average P56 against the dollar by the end of the year, up from its previous forecast of P57 per dollar.

“With the Fed’s austerity cycle likely to begin soon, the Philippine peso could still appreciate against the US dollar over time, which would keep the BSP relatively comfortable on currency (foreign currency) movements” , the report said.

However, BofA also noted that the peso could be sensitive to the Fed’s moves.

“Lower interest rates in the Philippines have increased the likelihood of even lower interest ratesFat the rate of the US dollar. This could gain importance as a factor driving corporate hedging behavior once the US dollar stabilizes,” the report said.

“These pressures could increase if the strength of the U.S. dollar strengthens or if U.S. interest rates rise again, increasing the Philippine peso’s sensitivity to the U.S. policy outlook.”

The peso closed at P56.333 against the dollar on Thursday, strengthening 16.7 centavos from P56.50 on Wednesday. This was the strongest finish in more than four months or since P56,315 on April 2.

The local currency has traded at the level of P57 or P58 per dollar in recent months.

“The Philippine peso has weakened against most Asian peers this year, partly due to the BSP’s dovish stance. With the next policy meeting still some time away, the US dollar rate could be the key factor driving the peso in the near term,” it added.