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Upside risks to the inflation outlook could slow the Bangko Sentral ng Pilipinas’ (BSP) rate-cutting cycle, analysts said.

“Should these upside risks eventuate, we may not be looking at 100-basis-point (bp) reduction for 2025 but perhaps at a more modest 50- to 75-bp reduction. As the BSP would put it, the final decision will continue to be data-driven,” GlobalSource country analyst Diwa C. Guinigundo said in a report.

Last week, the Monetary Board delivered a third straight rate cut at its final policy review for the year. This brought the benchmark to 5.75% from 6%.

The central bank has slashed rates by a total of 75 bps this year since it began its easing cycle in August.

“We think that cumulative rate cuts in 2025 will amount to 75 bps. We will revise this forecast if adverse geopolitical developments result in higher-than-projected inflation,” ANZ Research said, noting that the central bank hinted a “shallower” rate-cutting cycle next year.

BSP Governor Eli M. Remolona, Jr. said that delivering 100 bps worth of cuts next year may be “too much.”

The central bank will likely keep reducing rates in “baby steps” as an “insurance against a possible increase in inflation,” Mr. Remolona added.

Mr. Guinigundo said it was appropriate for the BSP to gradually shift to a less restrictive monetary stance.

“Given the risks, the BSP must be conserving its ammunition and chose to remain data-dependent,” he said.

He noted that the BSP also continued to flag upside risks to the inflation outlook. “This would partly explain the BSP’s decision to go slow in its easing mode,” Mr. Guinigundo said.

The BSP said the balance of risks to the inflation outlook continues to remain tilted to the upside for 2025 until 2026.

It raised several of its baseline and risk-adjusted forecasts for 2025 and 2026, though these all remain within the 2-4% target band. The central bank raised its baseline inflation forecast to 3.3% for 2025 (from 3.2%) and 3.5% for 2026 (from 3.4%). 

Meanwhile, the risk-adjusted forecasts were also increased to 3.4% for 2025 (from 3.3%). The risk-adjusted projection for 2026 was kept at 3.7%.

A report by Nomura Global Markets Research analysts Euben Paracuelles and Nabila Amani showed it expects the BSP to deliver a total of 75 bps worth of cuts before pausing in mid-2025.

“We maintain our forecast of 25 bps in rate cuts in each of the first three meetings in 2025, before pausing from there.”

“As is clear in BSP’s guidance in its last three decisions, the next decision by BSP will largely be driven by the inflation outlook for 2025 and 2026,” Nomura said.

It also noted that if headline inflation continues to ease, the BSP can “look to further remove the restrictiveness in the monetary stance to support a recovery in the growth outlook, which is facing downside risks.”

Meanwhile, Nomura said it also expects the BSP to deliver more rate cuts than the US Federal Reserve.

“As a result, we still think BSP can cut by more than the Fed, and indeed continue to decouple from its regional peers. In our view, BSP’s more orthodox approach is appropriate and provides much-needed clarity when the global environment is highly uncertain, enhancing BSP’s policy credibility,” it said.

Reuters reported that US central bankers now project they will make just two quarter-percentage-point rate reductions by the end of 2025.

That is half a percentage point less in policy easing next year than officials anticipated as of September, with Fed projections of inflation for the first year of the new Trump administration jumping from 2.1% in their prior projections to 2.5% in the current ones.

Capital Economics Assistant Economist Harry Chambers said the Philippines’ economic growth will also allow the central bank to pace its easing.

“A strong economy gives the BSP a platform to keep rate cuts gradual. GDP growth rebounded in the third quarter of the year, and while tight fiscal policy and weaker global demand will weigh on demand, strong consumption should ensure another year of solid growth in 2025,” he added.

Capital Economics expects 100 bps worth of rate cuts next year, bringing the key rate to 4.75% by end-2025.

Other risks

Meanwhile, Mr. Guinigundo flagged other upside risks that could stoke inflation in the near term.

“The plan to continue bringing down the country’s required reserve ratio may actually result in higher injection of liquidity which, other things being equal, may also turn out to be inflationary,” he said.

“This is one issue that the BSP may have to face in the future given its aggressive stance in reducing it to as low as zero.”

The BSP slashed the reserve requirement ratio for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% from 9.5%, effective last Oct. 25.

Mr. Remolona has said big lenders’ reserve requirements could be brought down to as low as zero before his term ends in 2029.

Meanwhile, Mr. Guinigundo also cited geopolitical tensions and fewer-than-expected rate cuts by the US central bank.

He said the Fed may have to also “go slow in its easing stance because of the potential inflationary effects of the incoming Trump administration’s higher tariff policy, more tax cuts and mass deportation.”

“The hit on the peso cannot be dismissed for its pass through to inflation. The US Fed may be constrained from maximizing its flexibility to reduce its own target rate,” he added.

The peso closed at PHP 58.81 a dollar on Friday, strengthening by 19 centavos from its record-low P59 finish on Thursday. This year so far, the peso has sank to the PHP 59 mark thrice.

“Tension could remain elevated given the sustained hostility in the Middle East and Eastern Europe. They could have collateral impact on external trade and capital flows and ultimately, peso depreciation and domestic inflation,” Mr. Guinigundo added.  – Luisa Maria Jacinta C. Jocson, Reporter

The country’s balance of payments (BoP) deficit widened in November as the government made more repayments on foreign debt, the Bangko Sentral ng Pilipinas (BSP) said on Thursday.

Data from the central bank showed the BoP position widened to a USD 2.276-billion deficit in November from the USD 216-million gap a year ago. It also more than tripled from the USD 724-million deficit in October.

November also marked the widest deficit in 26 months or since the USD 2.339-billion shortfall recorded in September 2022.

The BoP measures the country’s transactions with the rest of the world at a given time. A deficit means more funds left the economy than what went in, while a surplus shows that more money entered the Philippines.

“The BoP deficit in November 2024 reflected the National Government’s (NG) net foreign currency withdrawals from its deposits with the BSP to settle its foreign currency debt obligations and pay for its various expenditures, and the BSP’s net foreign exchange operations,” it said.

Earlier data from the BSP showed that the Philippines’ external debt service burden declined by 3.8% to  USD 8.68 billion in the January-to-August period.

Outstanding external debt hit a record USD 130.182 billion at the end of June. This brought the external debt-to-gross domestic product (GDP) ratio to 28.9% at the end of the second quarter.

In the first 11 months, the BoP stood at a surplus of USD 2.117 billion, 30% lower than the USD 3.03-billion surfeit in the same period a year earlier.

“Based on preliminary data, the decline in the cumulative BoP surplus was due to lower net receipts from trade in services and net foreign borrowings by the NG,” the central bank said.

The country’s trade deficit widened by 36.8% year on year to USD 5.8 billion in October, its widest trade gap in 26 months or since August 2022, data from the local statistics authority showed.

For the first 10 months, the trade deficit widened by 3.6% to USD 45.22 billion from the USD 43.64-billion gap a year ago.

“However, this decline was partly muted by the continued net inflows from personal remittances as well as net foreign portfolio and direct investments,” the BSP added.

In the first 10 months, cash remittances grew by 3% to USD 28.3 billion from USD 27.49 billion a year prior.

In the same period, BSP-registered foreign investments yielded a net inflow of USD 2.49 billion, a turnaround from the USD 715.43-million outflow in 2023.

Meanwhile, foreign direct investment (FDI) net inflows rose by 3.8% to USD 6.66 billion in the first nine months from USD 6.42 billion a year ago.

At its end-November position, the BoP reflected a final gross international reserve (GIR) level of USD 108.5 billion, down by 2.3% from the USD 111.1 billion as of end-October.

The dollar reserves were enough to cover 4.3 times the country’s short-term external debt based on residual maturity.

It is also equivalent to 7.7 months’ worth of imports of goods and payments of services and primary income.

An ample level of foreign exchange buffers safeguards an economy from market volatility and is an assurance of the country’s capability to pay debts in the event of an economic downturn.

This year, the BSP expects the country’s BoP position to end at a USD 2.3-billion surplus, equivalent to 0.5% of GDP.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the depreciation of the peso impacted on the net payment of foreign debt maturities.

The peso fell to the record-low P59-per-dollar level twice in November.

“For the coming months, the country’s GIR and BoP could still be supported by the continued growth in the country’s structural inflows from OFW (overseas Filipino worker) remittances, BPO revenues, exports, and relatively fast recovery in foreign tourism revenues,” Mr. Ricafort said.

He said further fundraising activities such as global bond issuances could also boost the BoP position.

Finance Secretary Ralph G. Recto has said they are looking to issue dollar- and euro-denominated bonds in the first half of 2025.

“Thus, still relatively high GIR at USD 108.5 billion could still strengthen the country’s external position, which is a key pillar for the country’s continued favorable credit ratings,” Mr. Ricafort said. — Luisa Maria Jacinta C. Jocson

The Philippine Islamic finance sector is expected to expand further on the back of government and regulatory support and growing demand for related products, Fitch Ratings said.

“Government initiatives to develop the Islamic finance industry in the Philippines are likely to support the sector’s growth in the medium to long term,” the debt watcher said in a commentary.

“Islamic finance initiatives could help the Philippines establish closer economic ties with the Gulf Cooperation Council (GCC) and ASEAN countries, such as Indonesia and Malaysia, and attract foreign direct investment,” it added.

In December 2023, the Philippine government issued its first-ever Islamic bonds, raising $1 billion from the sale of 5.5-year dollar-denominated Sukuk bonds.

Sukuk or Islamic bonds are certificates that represent a proportional undivided ownership right in tangible assets, or a pool of tangible assets. These assets could be in a specific project or investment activity that is Shari’ah-compliant.

“The 2023 sovereign sukuk is the only sukuk issued by an entity in the Philippines to date. However, growth is anticipated in the long-term,” Fitch said.

“Investors from the Middle East took up around 30% of that issuance, which was part of the country’s broader agenda to develop Islamic finance and diversify its investor base.”

The credit rater said last year’s issuance helped the Philippines “diversify funding, tap GCC Islamic investors, deepen its debt capital market, and establish a reference curve for other Philippine issuers to issue sukuk.”

Finance Secretary Ralph G. Recto has said they are looking to issue Sukuk bonds next year amid growing investor appetite from the Middle East.

“The government also aims to boost financial inclusion among Filipino Muslims, who form about 6% of the population but are largely underbanked. Islamic banking is estimated to have below 1% market share in the majority-Catholic country,” Fitch said.

It noted the Philippines’ efforts to create a more enabling environment for Islamic financing, such as issuing regulations, incentives and issuing a tax neutrality law.

The Bangko Sentral ng Pilipinas (BSP) has been encouraging lenders to participate in Islamic banking after the sector was opened to new players.

Last year, the central bank approved the modified minimum capitalization requirement for conventional banks with an Islamic banking unit (IBU). The rules aim to provide flexibility in licensing an IBU of qualified traditional banks and give more Filipinos access to Shari’ah-compliant banking products and services.

These measures helped boost activity in the Islamic banking sector, Fitch said.

Currently, the three entities with Islamic banking operations in the country are the state-owned Al Amanah Islamic Investment Bank, Maybank Philippines, which began operations in August, and CARD Bank, Inc., which opened an Islamic banking branch in Cotabato City this year.

This year, PRU LIFE Insurance Corp. of UK Philippines was also granted the first takaful license in the country, followed by Etiqa Life & General Assurance Philippines, Inc.

Takaful is a type of Islamic insurance where members contribute a certain sum of money to a common pool. Takaful insurance needs to be compliant with Shari’ah law, which prohibits riba (interest), al-maisir (gambling), and al-gharar (uncertainty) principles.

Fitch also noted the potential of the unbanked population, especially in the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM).

“According to a recent study by the Asian Development Bank, 70% of Filipinos (mostly Muslims) surveyed feel compelled to use interest-based products due to limited access to non-interest based financial solutions, and would prefer to use Islamic financial services,” Fitch said.

“The high remittance inflows from overseas Filipino workers, including in the GCC, many who use Islamic banks accounts, underscore the sector’s potential.”

Fitch also noted the public’s lack of awareness and understanding of Islamic banking.

“Moreover, the per capita income in Muslim-majority regions is relatively low, with generally low bankability and potentially more credit risks, making the region likely less attractive for banks. At present, there remains very few Islamic products in the market, with limited funding sources.” — Luisa Maria Jacinta C. Jocson

The Bangko Sentral ng Pilipinas (BSP) could cut benchmark interest rates by 75 basis points (bps) in 2025, Finance Secretary Ralph G. Recto said.

Mr. Recto, who previously projected 100 bps of cuts in 2025, told reporters the pace of easing will depend on various factors, such as inflation and the US Federal Reserve’s next moves.

“It depends also on what happens, what the Fed does. So, we have to wait for the inflation numbers, wait for what the Fed does, I suppose. But more or less, my expectation is 75 bps,” he said.

BSP Governor Eli M. Remolona, Jr. had earlier signaled that the Monetary Board could deliver rate cuts in the 100-bp range next year.

On Wednesday, the US Federal Reserve was expected to lower rates by 25 bps, which would bring the policy rate to the 4.25%-4.5% range. However, the pace of the Fed’s easing cycle remains uncertain as US President-elect Donald J. Trump assumes office in January.

Philippine headline inflation stood at 2.5% in November, bringing the 11-month average to 3.2%. This is still well within the BSP’s 2-4% target band.

Mr. Recto, who is also a member of the Monetary Board, said there is a “great possibility” that the central bank would deliver a third straight 25-bp cut at its final policy meeting for the year today (Dec. 19).

“There is a great possibility, [and] probability. I agree with the market consensus of a 25-bp (decrease),” Mr. Recto said.

A BusinessWorld poll conducted last week showed that 13 out of 16 analysts expect the Monetary Board to reduce the target reverse repurchase rate by 25 bps at its meeting today.

If realized, this would bring the benchmark rate to 5.75% from the current 6%, or a total of 75 bps worth of cuts by the end of 2024.

If the BSP delivers another 75 bps worth of cuts next year, it would bring the key rate to 5% in 2025.

The central bank began its easing cycle in August with a 25-bp cut. It delivered another 25-bp reduction in October.

In a separate report, Capital Economics said it sees up to 100 bps worth of rate cuts in 2025.

“With growth set to moderate and inflation likely to remain low, we expect a further 100 bps of cuts in 2025. This will take the policy rate to 4.75% at the end of 2025,” it said in a report released on Dec. 13.

Capital Economics said the strength of gross domestic product (GDP) growth is “unlikely to last.”

Economic managers earlier this month revised their GDP target to 6-6.5% this year from 6-7% previously after weak third-quarter growth.

The economy grew by an annual 5.2% in the July-to-September period, the weakest growth in five quarters or since the 4.3% expansion in the second quarter of 2023.

For the first nine months of the year, Philippine GDP growth averaged 5.8%, slower than the 6% print a year ago.

“Consumption is likely to be boosted by the drop in inflation and further cuts to interest rates, but we doubt the pace of consumption growth in Q3 is sustainable. What’s more, growth in remittances and exports will slow, amid weaker global growth,” Capital Economics said.

It expects inflation to remain low in the next quarters “due to a combination of weaker economic growth and a decline in food inflation.”

The central bank expects inflation to settle at 3.1% this year. — A.R.A. Inosante