BSP may cut rates by up to 100 bps this year

The Bangko Sentral ng Pilipinas (BSP) may cut borrowing costs by as much as 100 basis points (bps) this year as inflation is seen to stay mostly within the 2-4% target band, the Philippines’ Finance chief said on Monday. 

Finance Secretary and Monetary Board member Benjamin E. Diokno said the BSP could mirror the policy moves of the US Federal Reserve this year.

“So, a 75-basis-point cut by the Fed this year could actually be matched by the central bank. Or even 100 bps. Right now, the policy rate is at 6.5%, so I see something like 5.5% by the end of 2024,” Mr. Diokno said in an interview with Bloomberg TV.

“The timing, of course, would be data dependent and probably towards the second semester.”

The BSP kept the benchmark rate steady at a 16-year high of 6.5% at its December meeting. This was after the Monetary Board tightened rates by 450 bps from May 2022 to October 2023 to tame inflation.

Inflation averaged 6% in 2023, higher than 5.8% in 2022. It marked the second straight year that average inflation breached the BSP’s 2-4% target.

According to Mr. Diokno, inflation is expected to be within the 2-4% range throughout the first quarter of the year.

“Inflation might increase slightly in the second quarter because of base effects. But for the whole year of 2024, it will be within the target band of 2-4%, so that’s good news,” he said.

The central bank expects full-year inflation to ease to 3.7% this year and 3.2% in 2025, according to its baseline inflation forecasts.

Mr. Diokno noted the inflation rate for 2025 may continue to be within the 2-4% range, or around 3.5%.

Policy to remain tight
Meanwhile, Fitch Solutions’ BMI Country Risk & Industry Research said inflation would likely average 3.9% this year.

BMI said the Philippine central bank would likely keep policy tight in the first half, with rate cuts seen only in the second semester.

“We think rate cuts will only materialize in the second half of 2024 at the earliest, in line with our expectations for the US Federal Reserve… A quick return to easing before the Fed could dislodge inflation expectations and weaken the peso — something which the BSP will be mindful to avoid,” BMI said in a report dated Jan. 5. 

The US Federal Reserve kept borrowing costs unchanged at 5.25-5.5% at its policy meeting last month, but signaled rate cuts this year.

BMI said the Philippines’ growth momentum “reduces the urgency for the Monetary Board to cut lower interest rates.”

“This 2024 is set to be a stellar year and we forecast the economy to expand by 6.2%. This provides the BSP with more room to keep interest rates at multi-year highs for some time,” it said.

The government has set its 2024 growth target to 6.5-7.5%.

At the same time, Moody’s Analytics in a report said inflation has significantly eased from the 8.7% peak in January 2023, giving room for the BSP to begin monetary policy easing as early as June.

“The progress made supports our view that BSP’s tightening cycle has ended… We expect the BSP to hold the (key) rate steady until June, where we should see the first rate cut of 25 basis points,” Moody’s said.

However, the challenge for this year is to ensure inflation stays firmly within the 2-4% target, it said.

“We expect some volatility in the opening months of the year given the risk that the El Niño weather pattern could strengthen and keep food prices elevated,” it said.

Higher transport charges, increased electricity rates, and rising fuel prices are also other risks to the outlook, according to the research firm.

“That should see inflation bump up around the 4% mark before returning firmly to BSP’s target range by mid-2024. We look for the full-year inflation rate to average 3.4%,” it said.

BMI sees risks to interest rate forecasts tilted to the upside, with the BSP likely to tighten if the impact would be larger than anticipated.

“The biggest uncertainty surrounds the severity of El Niño weather conditions. Similar events are often accompanied by periods of higher food prices,” BMI said.

“While we have factored this into our projections, things could still deteriorate further. A strong surge in price pressures could prompt the BSP to resume its tightening cycle,” it added.

BSP Governor Eli M. Remolona, Jr. earlier said rate cuts are not on the table in the coming months, as inflation should be seen firmly within the 2-4% target range.

The Monetary Board is scheduled to meet on Feb. 15, its first monetary review this year, to discuss policy. — Keisha B. Ta-asan