Below-target growth to support further rate cuts 

Expectations of below-target growth and manageable inflation should support further rate cuts by the Bangko Sentral ng Pilipinas (BSP) this year, DBS Bank said in a report.

At the same time, a Nomura Global Markets Research analyst said the BSP could have delivered a rate cut instead of a pause at last week’s meeting amid “persistent” uncertainty.

“The growth-inflation dynamic backs further rate cuts, with the real rate buffer considerably wide at 2.5%-2.75%, providing room for monetary policy to be growth supportive,” DBS Senior Economist Radhika Rao said.

DBS expects gross domestic product (GDP) to grow below 6% this year after a weaker-than-expected 5.6% growth in 2024. The government is targeting 6-8% growth this year.

Inflation has been “buoyant” in the past few months, DBS said. Headline inflation remained steady at 2.9% in January, within the central bank’s 2-4% target.

“Food supply disruptions due to a lagged impact of typhoons, utility costs and a weaker peso were behind this spurt, though are likely to be viewed as temporary and will not deter the central bank from a dovish path,” it added.

DBS expects the central bank to deliver up to 50 basis points (bps) worth of rate cuts this year.

“After a 75-bp rate reduction in 2024, the BSP is likely to bide time to monitor risk of further tariffs and the consequent inflation/US dollar path, before resuming further easing,” Ms. Rao said.

The BSP left the benchmark rate unchanged at 5.75% on Feb. 13, with BSP Governor Eli M. Remolona, Jr. citing global uncertainties due to US trade policies.

Nomura Global Markets Research analyst Euben Paracuelles said central banks, including the BSP, might struggle to consider the implications of US President Donald J. Trump’s tariff policies.

“I think this is going to be a sort of a persistent type of uncertainty. We will never really get a good handle of it. And I think sometimes it’s better to be just reactive than proactive just because of the extent of the uncertainty,” he said in an interview on Money Talks with Cathy Yang on One News on Tuesday.

Mr. Remolona last week said the BSP is recalibrating their models to better account for these uncertainties and other “unusual” phenomena.

“The uncertainty in itself is the one that’s going to create some downside pressure and growth, whether it’s weighing on business sentiment and other indirect channels,” Mr. Paracuelles said.

“And more importantly, we’ve already seen this in the first Trump administration. So, it’s not that difficult to think about the risks and how they play out when we get some of these tariffs announced by President Trump.”

Mr. Trump is planning to impose reciprocal tariffs on every country that charges duties on US imports, a move that has raised fears of a wider global trade war.

“So, to me, it’s a downside risk to growth. And therefore, it’s not a reason for us (to hold rates). It’s actually a reason to keep cutting,” Mr. Paracuelles said.

He said the Philippine economy “still needs a little bit of support from all policy fronts.”

“So, after they paused, I think there’s a little bit of a change in the sequencing. There might be a little bit of a preference to inject liquidity via the RRR (reserve requirement ratio) cuts, which they’ve already done in October,” he said.

“I think they’re doing more. What that does really is it improves the policy transmission of later policy rate cuts, which I still expect for the rest of the year, given a very benign inflation outlook. So, the BSP can actually focus a little bit more on supporting the economy with all of these tools.”

The central bank is looking to bring down the RRR to 5% from 7% this year.

“The RRR could be front-loaded a little bit. I think April is a good window because, obviously, we have the elections coming in early May, and that means the critical conditions could tighten,” Mr. Paracuelles added.

The BSP reduced the RRR for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% from 9.5%, which took effect in October. — Luisa Maria Jacinta C. Jocson