BSP Preview: Rate cuts will be back shortly

From what has generally been a dovish tone throughout most of the year, recent statements from the central bank chief suggest it may be time for a break from monetary easing.

The Bangko Sentral ng Pilipinas (BSP) looks poised to keep rates steady in October, but Metrobank expects the central bank to deliver one more reverse repurchase rate (RRP) reduction in December.

Prices gaining steam

Headline inflation remains below the BSP’s target but has already shown signs of picking up. Inflation quickened to 1.5% in August year-on-year from the six-year low of 0.9% in July.

We continue to expect inflation to accelerate further in the next months due to low-base effects and other upside risks. Still, we expect full-year inflation to stay within the BSP’s 2%-3% target range.

A rate that’s just right

Smaller upside risks to inflation give room for the BSP to focus on economic growth for its monetary policy decisions. First-half GDP stands at 5.4%, only slightly short of the government’s 5.5%-6.5% forecast for FY 2025.

Although BSP Governor Eli Remolona expressed that he believes monetary policy has reached a “Goldilocks rate,” where inflation and growth remain in balance, he said a slowdown in growth, particularly from low demand, will warrant further easing.

Our call

Metrobank expects the BSP’s monetary board to keep rates steady next week, likely choosing to await the release of third-quarter GDP figures before considering another adjustment.

This will maintain the interest rate differential (IRD) at 100 bps following the Federal Reserve’s (Fed’s) reduction to the Fed Funds Rate (FFR) earlier this month.

A pause from the BSP will also be more supportive of the peso given the current USD/PHP levels, which lie above the 58-level despite a generally weak dollar.

We project household consumption and investment to remain tepid while the lagged effects of the BSP’s previous RRP reductions begin to make a significant impact. We expect this to be the reason for the BSP to deliver another reduction to the RRP during its last meeting for 2025 in December.

(Disclaimer: This is general investment information only and does not constitute an offer or guarantee, with all investment decisions made at your own risk. The bank takes no responsibility for any potential losses.)  

YOSHITAKA HIRAKAWA is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. He holds a Bachelor’s in Management Engineering from Ateneo de Manila University. With a background in data-driven decision making and quantitative methods, he aims to provide meaningful insights. Hungry for adventure, he constantly seeks new sights, sounds and experiences, from cliff jumping to trying new cuisines.