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The Bangko ng Pilipinas’ (BSP) policy path is skewed towards easing, but the pace of cuts should be carefully considered, an official said.

“In the case of the central bank, we’ve actually had two meetings where the Monetary Board has relaxed the policy stance. The messaging is that while the general direction is still for relaxation, the pacing has to be considered very carefully,” BSP Deputy Governor Francisco G. Dakila, Jr. said at the ASEAN+3 Economic Cooperation and Financial Stability Forum.

The Monetary Board is expected to deliver another 25-basis-point (bp) rate cut on Thursday, according to 13 out of 16 analysts in a BusinessWorld poll conducted last week.

If realized, this would be the third straight meeting that the central bank reduced rates.

It would also bring the benchmark rate to 5.75% from the current 6%, for a total of 75 bps worth of cuts by end-2024.

The BSP began its rate-cutting cycle in August with a 25-bp cut and delivered another cut of the same size in October.

BSP Governor Eli M. Remolona, Jr. earlier said they plan to implement rate cuts in “baby steps.” He also noted that while they are likely to continue further easing next year, it may not necessarily be done every meeting or every quarter.

“When we began the relaxation pace, we were thinking that in 2025, the Fed would be lowering by about 100 bps,” Mr. Dakila said.

“And now… that space has changed considerably because the Fed is now envisioned to move by just 50 bps in 2025,” he added.

Markets are awaiting further signals from the US Federal Reserve’s final meeting for the year. Investors see it as a near-given that the Fed will cut rates by a quarter point at its Dec. 17-18 meeting. However, markets have only priced in an 18% chance of a January cut, according to CME’s FedWatch tool, Reuters reported.

“Because of the changing inflation dynamics in the United States, it may be that right now, we’re not looking at a scenario where the Fed would be raising rates again,” Mr. Dakila said.

“But the most likely scenario is that they will still be reducing in 2025, but at a slower pace than before. And we have taken that into account into our policy scenarios,” he added.

However, Mr. Dakila said the BSP prefers to take into consideration domestic data in its policy decisions.

“But even so, the main consideration for monetary policy would be domestic inflation and how that relates to the target,” he said.

Headline inflation averaged 3.2% in the 11-month period, still well within the BSP’s 2-4% target range.

“Even when we look at the risk-adjusted forecast, they remain within the target band. So having said that, it’s the case, therefore, that the primary consideration for monetary policy would be domestic inflation, how inflation relates to the target,” Mr. Dakila said.

The central bank expects the inflation rate to average 3.1% this year.

Meanwhile, Mr. Dakila said that the peso’s recent performance has been similar to other currencies in the region. Currency movements are making less of an impact on inflation-targeting, he added.

“Just to note that with inflation targeting, what we’ve seen is that the sensitivity of inflation to changes in the currency has gone down considerably as the public has become more accustomed to seeing greater volatility in the peso.”

“I think that’s a good sign because that means that we can worry less about our ability to meet the inflation target while keeping to a market-determined exchange rate.”

The peso closed at PHP 58.671 per dollar on Monday, weakening by 20.1 centavos from its PHP 58.47 finish on Friday. This was its weakest finish since its PHP 58.71-per-dollar close on Nov. 27.

“Having said that, as the Board has already said, we retain the option to go into the market should there be any conditions that threaten to go into an abrupt change in the exchange rate that can dis-anchor inflationary expectations,” Mr. Dakila added. — Luisa Maria Jacinta C. Jocson

The Bangko Sentral ng Pilipinas (BSP) is expected to continue its rate-cutting cycle at its last policy review for the year on Thursday, analysts said.

A BusinessWorld poll conducted last week showed that 13 out of 16 analysts expect the Monetary Board to reduce the target reverse repurchase (RRP) rate by 25 basis points (bps) at its meeting on Dec. 19.

If realized, this would bring the benchmark rate to 5.75% from the current 6%.

This would also mark the third straight meeting the central bank will cut rates since it began its easing cycle in August with a 25-bp cut. It trimmed borrowing costs by another 25 bps in October.

On the other hand, one analyst expects the central bank to cut by 50 bps, while two analysts see the BSP keeping policy rates unchanged on Thursday.

“We now expect the BSP to cut the RRP rate by 25 bps at their Dec. 19 policy meeting,” Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said.

“While a pause (or skip) remains possible, recent economic data and external developments have aligned in favor of monetary easing,” he added.

Analysts attributed the expectations of another rate cut to easing inflation and weaker-than-expected third-quarter gross domestic product (GDP) data.

“My forecast is for the BSP to cut by 25 bps to 5.75% next week. Factors for this decision are GDP growth and inflation trend and outlook,” Security Bank Vice-President and Research Division Head Angelo B. Taningco said.

“We expect BSP to cut the policy rate by 25 bps to 5.75% with the latest inflation data still well within its target and the outlook continues to be benign,” Nomura Global Markets Research analyst Euben Paracuelles said.

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.

The central bank expects inflation to settle at 3.1% this year.

“We think that it is ripe for the BSP to cut another 25 bps this December. Inflation staying within the BSP’s target is one of the main reasons why we think that the BSP will consider to cut,” Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., said.

Mr. Neri said the inflation outlook for next year also supports the case for a rate cut.

For next year, the BSP expects inflation to average 3.2%, still within target.

“Recent inflation prints have been at the lower end of the BSP’s 2-4% target range, and we estimate that inflation will remain firmly within target going forward,” Chinabank Research said.

Slowing growth

Slower-than-expected economic output may also prompt further easing, analysts said.

Chinabank Research said the BSP may be prompted to further ease policy to “provide an additional boost to the economy, especially on the investments side.”

“Members are likely to be persuaded to ease further in the wake of the weaker-than-expected third-quarter GDP print, which we rightly predicted would disappoint market expectations,” Pantheon Chief Emerging Asia Economist Miguel Chanco said.

The Philippine economy sharply slowed to 5.2% in the third quarter from 6.4% in the second quarter and 6% a year prior.

Economic growth averaged 5.8% in the first nine months, short of the government’s revised 6-6.5% target for the year.

“Recent Philippine economic activity data have fallen short of government and analyst expectations,” Mr. Neri said.

“Thus, while many other factors have dragged economic performance since the pandemic, pressure on government officials to deliver a rate cut continues to build, especially ahead of the midterm elections,” he added.

Expectations of the US Federal Reserve’s continued easing cycle will also make more room for the BSP’s own rate cuts.

“If the US Fed doesn’t deliver its own 25 bps (cut), we believe that the BSP will all the more consider cutting key interest rates,” Mr. Asuncion said.

Trader bets on the cut at the US central bank’s Dec. 17-18 meeting stand at near 97%, according to CME’s FedWatch Tool, Reuters reported.

“The latest US inflation report reinforced expectations of a 25-bp rate cut from the Fed (this) week,” Chinabank Research said.

“If realized, this would allow the BSP to cut rates again without adding downward pressure on the peso, since its interest rate differential with the Fed would remain at a comfortable 125 bps,” it added.

Weak peso
The peso may also be a consideration for the central bank’s next monetary policy decision.

“As for external factors, the more stable performance of the peso against the US dollar over the last couple of weeks may alleviate concerns about the transmission of exchange rate fluctuations to overall price behavior,” Mr. Neri said.

Oikonomia Advisory & Research, Inc. economist Reinielle Matt Erece said that the BSP will opt for an increment of 25 bps as “anything deeper can cause the peso to depreciate faster against the dollar especially if the Fed maintains its policy rate.”

The peso closed at PHP 58.47 per dollar on Friday, weakening by 23 centavos from its PHP 58.24 finish on Thursday.

Last month, the peso fell to the record-low PHP 59-per-dollar level twice.

Moody’s Analytics economist Sarah Tan said that a weak peso could delay the BSP’s rate-cutting cycle.

“That said, policy easing remains likely as it would support private consumption, the primary driver of economic growth,” she added.

Meanwhile, Jonathan L. Ravelas, senior adviser at professional services firm Reyes Tacandong & Co., said there is room for the central bank to cut rates by 50 bps.

“With inflation at 2.5% in November, year-to-date at 3.2%, well within the BSP’s 2-4% target, they can cut by 50 bps to support growth following a slower growth in the third quarter,” he said.

“This will help ensure growth of at least 6.3%-6.5%. Fear of weakening currency as a result of cuts will improve the country’s competitiveness which will boost tourism, manufacturing support, business process outsourcing companies and overseas Filipino worker remittances,” he added.

Mr. Ravelas warned that it “might be difficult to cut rates next year as US President-elect Donald J. Trump assumes office.”

On the other hand, some analysts see the possibility of a policy hold on Thursday.

Ser Percival K. Peña-Reyes, director of the Ateneo de Manila University Center for Economic Research and Development, said the BSP will likely pause its easing cycle and keep its policy rate unchanged.

“I forecast that the Monetary Board will maintain its current policy rate. This is brought about by several factors like the fluctuating prices of oil, electricity and the depreciating value of the local currency against the dollar,” Emmanuel J. Lopez, professorial lecturer at the University of Santo Tomas Graduate School, said.

“Despite the slowdown in inflation, consumer products remain volatile in anticipation of the holidays, where demand pushes the prices at an upward trend,” he added.

2025 outlook

Meanwhile, analysts expect the BSP to continue cutting rates next year.

“For 2025, we forecast a 100-bp total cut and will be likely spread out once a quarter,” Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp., said.

In a report, Capital Economics said it expects 100 bps worth of cuts in 2025 as growth is likely to moderate and inflation is seen to remain low. This will bring the policy rate to 4.75% at the end of 2025.

This is in line with signals by BSP Governor Eli M. Remolona, Jr., who said the Monetary Board can deliver rate cuts in the 100-bp range next year.

However, he said the BSP may not necessarily cut at every meeting or every quarter.

“The BSP may cut its rates further in 2025, as local economic data may remain supportive,” Mr. Neri said.

On the other hand, he said external shocks could “cap the extent of rate reductions.”

“If President Donald Trump delivers on his campaign promises of massive tariffs and deportation, higher US inflation could translate to slower US rate cuts, if not outright policy reversals,” Mr. Neri said.

Mr. Ella said there is a “small possibility” the BSP will pause rate cuts if the Fed also decides to halt its policy easing.

“But, at this point, we see this as a low probability event for BSP, perhaps a 10% chance of happening but this should change if there are key developments and if official BSP language/communications indicate otherwise,” he added. – Luisa Maria Jacinta C. Jocson, Reporter

The national government’s (NG) debt service bill sharply rose in October as amortization payments for domestic borrowings went up, the Bureau of the Treasury (BTr) reported.

The latest data from BTr showed that the debt service bill stood at PHP 216.85 billion in October, surging by 179% from PHP 77.76 billion in the same month last year.

Month on month, the debt service bill also jumped by 131.65% from PHP 93.61 billion in September.

Debt service refers to payments made by the government on domestic and foreign borrowings.

The bulk or 74.46% of debt payments in October were made up of amortization payments, BTr data showed.

Amortization payments soared by 759.89% to PHP 161.46 billion in October from PHP 18.78 billion in the same month last year.

Broken down, principal payments on domestic debt sharply increased to PHP 120 billion in October from PHP 1.94 billion in 2023.

Principal payments on external debt increased by 146.29% to PHP 41.46 billion in October from PHP 16.84 billion in the same month a year ago.

On the other hand, interest payments fell by 6% to PHP 55.39 billion in October from PHP 58.98 billion in the same month last year.

Domestic interest payments slid by 10.82% to PHP 35.33 billion in October from PHP 39.62 billion last year.

Interest paid to foreign creditors increased by 3.56% to PHP 20.05 billion in October from PHP 19.36 billion in the same month in 2023.

Broken down, domestic interest payments composed of PHP 27.27 billion in fixed-rate Treasury bonds, PHP 3.58 billion in retail Treasury bonds, PHP 2.77 billion in Treasury bills (T-bills) and others (PHP 1.73 billion).

“The increase in amortization could have been caused by several factors. First, an increase in government debts maturing that month,” Ateneo School of Government Dean Philip Arnold “Randy” P. Tuaño told BusinessWorld in an e-mail.

Mr. Tuaño said a significant portion of debts matured in October, “it would have required the government to repay the principal amounts to creditors.”

He also attributed the increase in amortization to the lower interest rate environment in October as may have caused the government to pre-pay some of the higher interest rate debts.

The Bangko Sentral ng Pilipinas began its easing cycle in August amid slower inflation. It cut rates by 25 basis points (bps) in August, and by another 25 bps in October, bringing the benchmark rate to 6%.

The Monetary Board is expected to reduce the target reverse repurchase (RRP) rate by 25 bps at its meeting on Dec. 19, according to 13 out of 16 analysts said in a BusinessWorld poll last week. If realized, this would bring the benchmark rate to 5.75% from the current 6%.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the sharp year-on-year decline in debt servicing cost was due to the “bigger matured government securities.”

For the remaining months, Mr. Ricafort said there would be “seasonal reduction” in matured government securities due to “reduced Treasury bill and Treasury bond auctions in view of the holidays mode especially in the latter part of December, as consistently seen for many years.”

For the first 10 months of the year, the NG debt service bill stood at PHP 1.86 trillion, up by 25.88% from PHP 1.48 trillion in the same period last year.

Amortization payments accounted for 65.67% of the 10-month total. It jumped by 27.42% to PHP 1.22 trillion as of end-October from PHP 958.96 billion a year ago.

Amortization payments on domestic debt rose by 17.07% to PHP 999.74 billion, while external payments surged by 111.6% to PHP 222.22 billion.

On the other hand, interest payments increased by 23.03% to PHP 638.68 billion in the first 10 months from PHP 519.11 billion a year ago.

Interest payments on domestic debt amounted to PHP 453.46 billion, while those on external debt stood at PHP 185.22 billion.

As of end-October, domestic interest payments included PHP 296.49 billion in fixed-rate Treasury bonds, PHP 117.87 billion in retail Treasury bonds, PHP 28.4 billion in T-bills and others (PHP 10.71 billion).

The NG’s debt stock rose to a fresh high of P16.02 trillion as of end-October. – Aubrey Rose A. Inosante, Reporter