More room for easing amid slow inflation — analysts

The Bangko Sentral ng Pilipinas (BSP) has more room to further reduce interest rates due to an easing inflation outlook, though the need to be cautious remains amid uncertainties.

“The February inflation outturn supports the BSP’s prevailing assessment that inflation will remain within the target range over the policy horizon,” the central bank said in a statement late on Wednesday. 

The February consumer price index (CPI) eased to 2.1% from 2.9% in January and 3.4% a year ago. This was also the slowest inflation print in five months.

The February print was also well below the 2.6% median estimate in a BusinessWorld poll of 18 analysts conducted last week.

“We think February CPI supports, not just a continuation of the BSP’s easing cycle next quarter, but a policy rate cut regardless of the Fed,” HSBC economist for ASEAN Aris D. Dacanay said in a report.

Citi Economist for the Philippines Nalin Chutchotitham said there is “ample room to resume its rate-cutting cycle, especially against a backdrop of growth headwinds.”

She said inflation is expected to stay at the lower end of the BSP’s 2-4% target range for the rest of the year.

Citi revised its full-year inflation forecast to 2.6% this year from 3.2% previously. It expects inflation to settle at 2.2% in March, 2.6% in the second and third quarters and 2.7% in the fourth quarter.

“The modest upward trajectory that we forecast for the rest of 2025 largely reflects base effects from sequential softening in rice and energy prices between April to December, even as we expect inflation momentum to remain subdued, largely on expected decline in crude oil prices.”

“Even so, inflation will stay firmly in the lower half of BSP’s target for the rest of 2025,” Ms. Chutchotitham added.

The BSP expects inflation to average 3.5% this year

Mr. Dacanay said risks to the inflation are tilted to the downside as “retail rice prices still have room to decrease while global energy prices are easing.”

“The pressure to ease policy rates even further has been growing with household consumption slightly stumbling due to today’s high-interest rate environment,” Mr. Dacanay said.

“Given low inflation, we believe the BSP has room to rebalance its risks from FX stability and inflation to supporting growth. And this room to rebalance risks will likely grow larger in the coming months.”

The Philippine economy expanded by a weaker-than-expected 5.2% in the fourth quarter, bringing full-year growth to 5.6% or below the government’s target.

“With the government aiming to boost rice supply in the economy via its buffer stocks, we can expect retail rice prices to continue delivering downward pressure on inflation,” Mr. Dacanay said.

Rice inflation contracted to 4.9% in February, the lowest rice inflation since the 5.7% decline in April 2020.

“The decline in rice prices is particularly important, as historical data show that rice has the greatest influence on consumer behavior,” Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said.

“Spending on other items usually deteriorates when rice prices are high. With rice prices now falling, consumer spending may see a notable recovery this year.”

Further easing

The central bank said it will continue to monitor headwinds and global uncertainties.

“Nonetheless, uncertainty over global economic policies and their potential impact on the domestic economy continue to warrant close monitoring,” the BSP said.

The central bank said it will “carefully consider all new available information at its April 3 meeting.

BSP Governor Eli M. Remolona, Jr. earlier said that despite keeping rates steady at its February meeting, it is still in easing mode. He signaled the possibility of up to 50 bps worth of rate reductions this year.

For this year, Citi expects the central bank to deliver three rate cuts in increments of 25 bps at each of its April, August and December meetings. This would bring the benchmark to 5% by end-2025.

“Due to the room to absorb FX-induced inflation, we think February CPI builds a case for the BSP to continue its easing cycle regardless of the Fed,” Mr. Dacanay said.

Inflation falling towards the lower end of the target will act as a buffer if the policy rate differential between the BSP and Federal Reserve is too narrow, or if the BSP were to cut even if the Fed does not, he said.

Ms. Chutchotitham likewise said that the Philippines does not need to be in lockstep with the Fed.

“I think that the BSP continues to focus on what’s happening with the domestic economy, their mandate stresses on inflation mainly. And I think that the Fed is one factor to consider… but (that’s) only one factor,” she added.

Last year, the BSP began its easing cycle ahead of the US central bank, delivering its first rate cut in August versus the Fed’s first move in September. 

“Slower inflation keeps the door open for BSP rate cuts this year, especially if the GDP data in May falls short of expectations,” Mr. Neri said. “However, we continue to believe that the space for easing this year remains limited.”

Mr. Neri said global uncertainties could make the peso vulnerable amid the country’s current account deficit.

“Maintaining interest rates at appropriate levels may offset the impact of these uncertainties,” he added.