One for the road: BSP and Fed to cap 2024 with a rate cut

Monetary authorities in the US and the Philippines are expected to end the year with another rate cut, sustaining their policy easing cycle amid benign consumer prices.

We forecast a 25-basis point (bp) reduction in policy rates from both the US Federal Reserve (Fed) at its December 17-18 meeting, and from the Bangko Sentral ng Pilipinas (BSP) at its December 19 meeting.

Fed’s mixed signals

• Last December 2, Fed Governor Christopher Waller suggested he supports another cut in December, noting that inflation is still seen to move toward the Federal Open Market Committee (FOMC)’s 2% target. He also said that the current monetary environment is still “too restrictive” and that a December cut would barely affect that.
• FOMC Chair Jerome Powell gave a less dovish stance in his recent statements, citing a US economy that is stronger than expected, lesser downside risk in the labor market, and slightly higher inflation. On November 14, Powell said that the US economy is “not sending any signals” to “hurry to lower rates”. He doubled down a few weeks later, saying on December 4 that the Fed can now “afford to be a little more cautious.”

Still Powell’s statements have not dampened expectations for another 25-bp cut in December, with the market still almost fully pricing in – 96%, according to Bloomberg – a rate reduction this month.

US inflation has been on a slight uptrend in the last few months. Still, shelter prices, the biggest contributor to US inflation, continue to slow year-on-year. This reinforces our view that US inflation tracks the 2% target, providing room for the Fed to reduce the Federal Reserve Funds rate by 25 bps to 4.50% in the next meeting.

BSP’s data dependence

• On November 20, BSP Governor Eli Remolona Jr. said that the easing cycle is still ongoing while also keeping the door open for a pause, depending on data.
• The January to November headline inflation sits at 3.2%, within the BSP’s 2%-4% target for the full year.
• Economic growth remains robust, with the year-to-date expansion at 5.8% as of the third quarter.

In the July to September period, consumer and investment spending began picking up following the start of the BSP’s monetary easing cycle.  Despite the improvements, growth is projected to still settle below the official government target of 6-6.5% for 2024. Given this, and with inflation likely to remain within target, the BSP has room to continue its monetary easing to further stimulate consumption and investment expenditure and drive higher growth next year.

We forecast the BSP to cut the reverse repurchase rate by 25 bps to 5.75%. We also project BSP to carry out three rate cuts in 2025.

(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.)  

MARIA KAILA BALITE  is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. 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. Outside of work, her interests include thriller movies, K-dramas, and dogs.  

EZRA VIDAR is a Research Analyst of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She graduated from the University of the Philippines – Diliman with a degree in BS Business Economics. In her free time, she likes listening to Twice and Taylor Swift.