Policy rate preview: BSP to make a calibrated move

A surprisingly low consumer-price rise in September has raised questions among market players: will monetary authorities cut policy rates by a quarter or half-point?

Risks remain, but target still locked 

Even with the surprisingly low September inflation print of 1.9%, the year-to-date average is 3.4%. That’s well within the 2-4% target of the Bangko Sentral ng Pilipinas (BSP).

On the downside, rice prices are expected to remain a drag inflation following the start to the harvest season and lower tariffs for the grain.

Yet oil prices pose an upside risk as Middle East tensions persist. Prices of crude oil seesawed in the first weeks of October. We may see prices begin to rise again, given higher possibility of Israel retaliating against Iran, the third largest oil producer among members of the Organization of the Petroleum Exporting Countries (OPEC).

The La Niña weather phenomenon is also a considerable upside risk, as the persistent rains threaten food production and stoke costs of staples.

With price risks broadly balanced, annual headline inflation will likely be slightly above 2% in the remaining months of 2024, averaging a tad above 3% for the full year.

Who says what? 

Shortly after the BSP delivered its 25 basis points (bps) cut on August 16, BSP Governor Eli Remolona Jr. said current economic conditions provide room for one more interest rate cut this year, partly depending on the US Federal Reserve’s actions.

Meanwhile, Finance Secretary Ralph Recto – who also sits on the BSP’s Monetary Board (MB) – signaled a more dovish stance on September 19. He said rates could be lowered by a single 50 bps cut in October, like the Fed’s move in September.

As the rate decision day approaches, sentiment appears shifting toward a smaller 25-bps reduction. On September 25, Remolona said that while BSP has room for a 50-bps policy rate cut, such moves are only delivered if the economy is headed for a hard landing. He said a quarter-point reduction is made at normal times.

Still, the Fed’s bigger rate cut and upside risks to domestic inflation remain factors to the BSP’s decision.

BSP to take it slow

With BSP Governor Remolona recently putting emphasis on a “calibrated” easing and with full year inflation remaining well-within target, we expect the BSP to take it slow with a 25-bps cut on October 16.

MARIA KAILA BALITE is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides macroeconomic research, forecasts, and insights, as well as regular and ad hoc economic reports for both internal and external stakeholders. She holds a Master’s degree in Applied Economics and also majored in Financial Economics for her Bachelor’s degree, both from De La Salle University Manila. Prior to Metrobank, she was an Economist at the Office of the Chief Economist of the Department of Finance. Outside of work, her interests include thriller movies, K-dramas, and dogs.

YOSHITAKA HIRAKAWA is a Financial Markets Sector Management Trainee at Metrobank. He graduated from the Ateneo de Manila University with an undergraduate degree in Management Engineering. With a background in data-driven decision making, he aims to provide meaningful insights. He constantly chases adventures, exploring the streets for new sights and experiences.