‘Larger-than-expected’ rate cuts likely — Nomura

The Bangko Sentral ng Pilipinas (BPS) may deliver “larger-than-expected” rate cuts, with the possibility of up to 250 basis points (bps) worth of reductions until 2025, Nomura Global Markets Research said.

“Compared to our baseline, risks are skewed towards more easing in the Philippines and Thailand, less easing in India,” it said in a report.

In June, the Monetary Board kept its benchmark rate unchanged for a sixth straight meeting at 6.5%, the highest in over 17 years.

Nomura’s baseline forecast for the Philippines’ policy rate is at 5% at end-2025. However, its Modified Taylor Rule (MTR) estimates see the key rate slashed to as low as 4%.

According to the report, the MTR estimates to “quantify where Asian policy rates ‘should be.’”

Nomura’s baseline projection also anticipates the BSP to deliver a rate cut in October. It projects a total of 150 bps of cuts by the second quarter of 2025.

“However, the MTR suggests this would leave policy rates in restrictive territory, given an imminent fall in inflation to below the midpoint of the 2-4% target range, partly aided by lower rice prices.”

“The MTR suggests policy easing should begin in Q3 2024, with 250 bps of cumulative cuts to a terminal rate of 4% by Q2 2025,” it added.

BSP Governor Eli M. Remolona, Jr. has said that the central bank is on track to begin policy easing by August.

He said that the BSP could cut rates by up to 50 bps this year, with a 25-bp cut each in the third and fourth quarters.

The Monetary Board has raised rates by a cumulative 450 basis points (bps) from May 2022 to October 2023.

Nomura also noted the improved expectations of the US Federal Reserve cutting rates this year.

“The global backdrop has also become more conducive, with US core (consumer price index) inflation softening in June and setting the stage for the Fed to cut policy rates twice this year, in September and December, consistent with our US economics team’s baseline views,” it said.

US consumer prices fell for the first time in four years in June amid cheaper gasoline and moderating rents, firmly putting disinflation back on track and putting the Federal Reserve another step closer to cutting interest rates in September, Reuters reported.

Financial markets saw a roughly 85% chance of a rate cut at the Fed’s September meeting, compared with about a 70% chance seen before the report. Two rate cuts are anticipated this year.

Mr. Remolona earlier said that the BSP does not need to wait for the Fed before it begins cutting rates.

He said that while the BSP monitors the Fed’s moves, it is not a “decisive factor” in its own monetary decisions.

The Monetary Board’s (MB) next policy review is on Aug. 15. This is MB’s only meeting scheduled in the third quarter. It is also set to meet on Oct. 17 and Dec. 19, its last two meetings for the year. — Luisa Maria Jacinta C. Jocson