BSP easing cycle to reverse slowing consumption growth — Metrobank

The Philippine central bank’s expected easing cycle could reverse anemic household spending in a country where consumption accounts for more than two-thirds of the economy.

“As the BSP’s policy easing takes effect, Filipinos can look forward to a more favorable economic environment,” Marian Monette Q. Florendo, a research and business analytics officer at Metropolitan Bank & Trust Co. (Metrobank), said in a report.

“The combination of lower policy rates and easing inflation is anticipated to provide support for both private consumption and investments, potentially reversing the adverse effects of prolonged high interest rates,” she added.

The Bangko Sentral ng Pilipinas’ (BSP) Monetary Board cut borrowing costs by 25 basis points (bps) last month, bringing the key rate to 6.25% from the over 17-year high of 6.5%. This was the first time it cut rates in nearly four years.

“This policy shift is expected to have far-reaching effects on the Philippine economy, particularly in stimulating private consumption and investments.”

Metrobank said there had been a “significant slowdown” in household final consumption expenditure amid elevated interest rates.

Growth in household spending, which accounted for 67.8% of Philippine economic output in the second quarter, slowed to 4.6% from 5.5% a year ago, according to the local statistics agency.

It was also the slowest growth since the 4.8% decline in the first quarter of 2021.

Excluding the pandemic years, Metrobank said this was the slowest pace of spending since 2010. “This tepid growth falls below the 10-year pre-pandemic average, indicating a constrained consumer spending environment,” Ms. Florendo said.

Further policy rate reductions could serve as the “catalyst to reinvigorate the Philippine economy.”

Metrobank expects the benchmark rate to end the year at 5.75% and further down to 5% by next year.

“This aligns with expectations that the US Federal Reserve will also begin its easing cycle in September,” it added.

Investors are pricing in a 42% probability of a 50-basis-point rate cut at the Sept. 17-18 meeting of the Fed, up from 30%, Reuters reported, citing the CME FedWatch Tool.

Meanwhile, the BSP’s rate-cutting cycle could pave the way for lower credit card rates and affordable loan terms. This would “provide immediate relief to consumers burdened by high-interest credit card debt.”

“As policy rates decrease, overall loan rates are likely to follow suit,” Ms. Florendo said. “This opens up opportunities for Filipinos to avail [themselves] of new loans at more favorable rates or to negotiate better terms for existing loans.”

Lower loan rates could free up cash flow for households, allowing them to either pay down existing debt more quickly or rebuild their savings, she pointed out.

Metrobank expects inflation to settle at 3.3% this year and 3.1% in 2025, within the BSP’s 2-4% target.

The forecast is supported by expected easing rice prices, backed by government policies and a balanced assessment of other inflation risks, it added.

Inflation likely slowed to 3.7% in August, according to the median estimate of 15 analysts in a BusinessWorld poll. It hit a nine-month high of 4.4% in July. — Luisa Maria Jacinta C. Jocson