The policy interest rate will be 4.5-5% in 2025

By means of Luisa Maria Jacinta C. Jocson, Reporter

THE BANGKO SENTRAL ng PiliThe Pinas (BSP) rate cut cycle is expected to continue until early 2025, with final interest rates as low as 4.5-5%, analysts said.

“This is unlikely to be a one-off rate cut,” Robert Carnell, head of research and chief economist for Asia Pacific at ING Bank NV, said in a report.

“We see inflation stabilizing around the 3.5% level in 2025, so if we take into account a positive real (inflation-adjusted) policy rate, a final BSP policy rate would be around 4.5%- 5%, another 125-175 basis points (bps) lower than today,” he said.

HSBC expects the BSP to make another 25 basis point cut this year and a 100 basis point cut in 2025 to bring the policy rate to 5%.

HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay said the BSP’s easing cycle is likely to be gradual.

“We think that the BSP aFFord to gradually lower the policy rate because nothing terrible is happening on the growth front. In fact, the labor market remains very strong, with employment exceeding what the demographic trend would suggest,” he said in a report.

The Monetary Board cut rates by 25 bps last Thursday, bringing the benchmark rate to 6.25%, down from a 17-year high of 6.5%.

This was the FThe BSP reduced rates for the first time since November 2020.

BSP Governor Eli M. Remolona Jr. said the central bank will support a “calibrated shift to a less restrictive monetary policy” as it believes risks to the inflation outlook for this year and 2025 will continue to lean to the downside.

Mr Remolona said there is room for another rate cut in the fourth quarter, possibly by 25 basis points. The Monetary Board’s last two policy-setting meetings for the year are on October 17 and December 19.

ANZ Research expects the same a 25 basis point cut in the fourth quarter due to “weak private consumption and improving inflation prospects”, with the rate cut cycle set to continue until early 2025.

Mr Carnell said the BSP’s continued easing cycle is due to expectations of an inFdownward trend.

“Filipino inFThe economy is likely to slow significantly in the coming months as rice prices remain high at worst but fail to further stimulate the economyFas last year’s price increases disappear from the year-on-year comparison,” Mr Carnell added.

InFInflation accelerated to a nine-month high of 4.4% in July. The BSP expects inFThe target will be achieved again from August.

The central bank is watchingFan average of 3.4% this year and 3.1% in 2025.

“We could see BSP following the Fed one by one as the Fed in the coming months Fwill eventually start its own easing cycle – depending on how the (peso) behaves. And further easing appears likely in 2025,” Mr Carnell said.

Financial markets are pricing in a 74.5% probability that the Fed will cut its key policy rate by 25 basis points at the end of the September policy meeting, with a declining 25.5% probability of a massive 50 basis point cut, according to the report. was evident from CME’s FedWatch tool. Reuters reported this.

“This is about the Ffirst regular rate cut in Asia and the PacificFThe United Nations Central Bank, and in anticipation of expected easing from the Federal Reserve, makes this move all the bolder,” Mr Carnell added.

Mr Dacanay said monetary policy will now be more dependent on data.

“Any step-by-step interest rate cut will depend on the direction in which interest rates goFThe ratio depends on expectations (up or down),” he added.

IMPACT ON PESO
The BSP easing cycle is also unlikely to materializeFhave a major impact on the local currency, analysts said.

“The peso is still one of the best performing Asian currencies to date. With the Fed set to cut spending in September and the US dollar index softening, the BSP rate cut is unlikely to lead to major renewed weakness,” ANZ Research said.

The local unit closed at P57.245 per dollar on Friday, weakening 34.5 centavos from P56.90 Foff on Thursday. The peso has been slowly recovering since falling to the P58 level per dollar in May.

“The market’s immediate reaction was that the Philippine peso weakened only slightly, suggesting this is not seen as an extravagant move,” Mr Carnell said.

Meanwhile, Enrico P. Villanueva, associate professor at the Department of Economics at the University of the Philippines, Los Baños, said the rate cut “should have happened earlier because both actuallyFThe figures and forecasts are already within the target.”

“Due to persistently high rates, consumption and investment have been tepid. The increase in investment in the second quarter was largely a result of government spending on infrastructure trickling down to the allied private construction sector,” he said via Messenger.

Household consumption, which makes up about three-quarters of the economy, fell to 4.6% in the second quarter from 5.5% a year ago.

“Nevertheless, the change in policy stance and the actual rate cut are still a welcome development. They set the government’s policy direction and reduced uncertainty about when monetary easing will actually begin,” Mr. Villanueva added.

RRR CUTTING
Meanwhile, analysts expect that the BSP may soon start cutting banks’ reserve requirements (RRR).

“The BSP can hopefully start cutting the RRR from 9.5% sometime later this year and hopefully through much of 2025,” said Bank of the Philippine Islands (BPI) Chief Economist Emilio S. Neri, Jr. , in a Viber message.

“The Monetary Board has room to alternate RRP and RRR cuts as long as liquidity and monetary conditions continue to support their price stability mandate,” he added.

BSP Governor Eli M. Remolona, Jr. said last week that the RRR should be cut “substantially” as it is currently at “ridiculous” levels. Mr Remolona previously said this could be reduced to as little as 5%.

Reducing the reserve requirement must be properly timed and carried out during a period in which the central bank is already easing, he said earlier.

The current level is “distorting” financial intermediation and driving a wedge between lending and deposit rates, he added.

The RRR is the percentage of bank deposits and deposit replacement liabilities that banks cannot lend and must set aside in deposits with the BSP.

The BSP lowered the ratio for large banks and non-banks Ffinancial institutions with quasi-bank functions by 250 basis points to 9.5% in June 2023.

The central bank has cut the RRR for universal and commercial banks to a single-digit level from a high of 20% in 2018.

“Each 1% reduction in RRR is estimated to free up about P150 billion in bank liquidity, or the equivalent of 18% of the net supply of RPGB (Republic of the Philippines Government Bonds) in the Ffiscal year, although much of it would likely be included in the BSP’s monetary instruments,” ANZ Research said.

Robert Dan J. Roces, chief economist at Security Bank Corp., said lowering the RRR “would inject more liquidity into the banking system, which would technically lead to more lending, lower borrowing costs and stronger economic growth.”

“The BSP will weigh the pros and cons, and as the Governor has said, the optimal timing and magnitude of a reserve requirement reduction will depend on factors such as inflation, economic growth and Ffinancial system stability,” he said in a Viber message.

On the other hand, Mr. Dacanay said the current policy level of 6.25% is still restrictive.

“We think the discussion on lowering the reserve rate will come to the fore when the policy rate is normalized to a more neutral level,” he added.