BSP eyes 50-bp rate cuts this year

The Bangko Sentral ng Pilipinas (BSP) may cut interest rates by 50 basis points (bps) this year, its top official said.

“Seventy-five basis points might be too much, maybe 50 bps. We need a bit of policy insurance,” BSP Governor Eli M. Remolona, Jr. told reporters on the sidelines of the BSP Media Information Session in Baguio City on Saturday.

Mr. Remolona said that this could be delivered in increments of 25 bps each in the first and second half of the year.

“I think that sounds about right, 25 bps (in the) first half, 25 bps (in the) second half. Not every meeting we’ll see a policy rate decline,” he added.

The central bank began its easing cycle in August last year, slashing borrowing costs by a total of 75 bps by end-2024.

The Monetary Board delivered three straight rate cuts, bringing the benchmark to 5.75%.

Mr. Remolona said “there is no need” for a 100 bps worth of reductions this year as the country is far from a “hard landing” scenario.

“Central banks around the world learned to do things gradually except when there is an impending hard landing. Hard landing usually means a cut of more than 25 bps. We don’t see a hard landing in the near future,” he said.

On Friday, Mr. Remolona said a rate cut is still on the table at the Monetary Board’s first policy review meeting this year on Feb. 13.

The BSP chief said a negative output gap could prompt further monetary easing.

“Right now, we have a kind of a negative output gap. We’re growing at a little bit below capacity and whether that (growth) number widens that gap, our capacity and how much we’re really growing.”

“If the gap is widening, if it becomes more negative, then it would call for more easing,” he added.

The Philippine’s gross domestic product (GDP) grew by 5.6% in 2024, falling short of the government’s 6-6.5% target.

In the fourth quarter, GDP growth expanded by a weaker-than-expected 5.2%, the slowest print since the 4.3% logged in the second quarter of 2023.

Meanwhile, Mr. Remolona said they are also monitoring the US Federal Reserve’s moves but do not see the need to necessarily fall in step with the US central bank.

“Of course, it affects what we will do because it affects what happens to the economy, what happens to inflation rates. In that respect, it affects what we do but we don’t copy them. We don’t just follow them.”

The Fed, in its January meeting, kept benchmark interest rates unchanged as widely expected, after easing a full basis point in 2024. This marks the first pause since the start of its easing cycle in September, Reuters reported.

RRR cut

Meanwhile, the BSP chief said the central bank is eyeing another cut in banks’ reserve requirement ratio (RRR) this year.

The Monetary Board is eyeing to reduce reserve requirements by 200 bps to 5% this year, he said.

“That’s the amount that we’re discussing, 200 bps. From 7% to 5% for the big banks,” Mr. Remolona said.

This may be delivered sometime in the middle of the year, he added, likely in June or July.

The central bank reduced the RRR for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% from 9.5%, which took effect last October.

It also cut the RRR for digital banks by 200 bps to 4% and for thrift lenders by 100 bps to 1%. Rural and cooperative banks’ RRR was also slashed by 100 bps to 0%.

“In a way, the policy rate cut is a substitute for cutting the reserve requirements. They have similar effects on the economy… We want to bring it lower but the timing matters, because we are also cutting the policy rate,” Mr. Remolona said.

“The nice thing about the reserve requirement is it affects both the deposit rate and the lending rate. So, it should raise the deposit rate a little bit if you cut the reserve requirement while lowering the loan rates.”

The RRR is the portion of reserves that banks must hold onto to ensure they can meet liabilities in case of sudden withdrawals. When a bank is required to hold a lower reserve ratio, it has more funds to lend to borrowers.

From a high of 20% in 2018, the central bank has since brought down reserve requirements to single-digit levels. – Luisa Maria Jacinta C. Jocson, Reporter

Poll: Inflation likely eased to 2.8% in January

Headline inflation may have eased in January amid lower electricity rates and food prices, analysts said.

A BusinessWorld poll of 16 analysts yielded a median estimate of 2.8% for the consumer price index (CPI) in January.

This is within the 2.5%-3.3% forecast of the Bangko Sentral ng Pilipinas (BSP) for the month and the 2-4% target range.

If realized, January inflation would have eased from 2.9% in December and matched the 2.8% print a year ago.

The Philippine Statistics Authority (PSA) is set to release January inflation data on Feb. 5 (Wednesday).

“We expect headline inflation to ease, driven by lower food price inflation, while a decline in electricity generation rates partly offset a pickup in retail fuel prices,” Nomura Global Markets Research analyst Euben Paracuelles said.

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said food inflation has been steady “largely due to reports that rice prices have declined versus prior months with favorable supply prospects following the end of El Niño.”

Rice inflation sharply slowed to 0.8% in December from 5.1% in November and 19.6% a year prior.

The PSA earlier noted the possibility of rice inflation turning negative in January.

“We expect headline inflation to decelerate on the back of retail rice prices falling to P37 per kilogram and electricity prices easing,” HSBC economist for ASEAN Aris D. Dacanay said.

Manila Electric Co. lowered the overall rate by P0.2189 per kilowatt-hour (kWh) to P11.7428 per kWh in January from P11.9617 per kWh in December.

Oil-price hikes

On the other hand, analysts flagged risks that could stoke inflation, such as fuel costs.

“While electricity rates eased on the back of lower generation charges, domestic fuel prices were up over three straight weeks in January due to higher global oil prices,” Sarah Tan, an economist from Moody’s Analytics, said.

In January, pump price adjustments stood at a net increase of P2.65 a liter for gasoline, P4.80 a liter for diesel and P3.80 a liter for kerosene.

Mr. Dacanay said inflation could have eased further if not for other non-core components.

“For instance, retail fuel prices continue to climb due to a strong US dollar, while pork prices jumped as the increase in African Swine Flu cases took a toll on supply,” he said.

“Higher prices were observed for fuel as well as for key food items such as vegetables, meat, fish, and fruits,” Chinabank said.

Food inflation could have also reflected the impact of storm damage late last year, Ms. Tan said.

“Flood damage knocked food production in the final months of 2024, stoking inflation. These upward price pressures are expected to linger into the opening month of the new year,” she added.

Several storms hit the country in the fourth quarter, leading to billions of pesos worth of agricultural damage. The combined effects of tropical cyclones Kristine and Leon resulted in PHP 9.81 billion in agriculture losses.

“Further, water rates were also upwardly revised as of Jan. 1, which will add to households’ and businesses’ utility bills through the year,” Ms. Tan said.

“The higher water rates are said to contribute to the expansion of water service and infrastructure projects,” she added.

The Metropolitan Waterworks and Sewerage System Regulatory Office had approved a P5.95-per-cubic-meter increase for Manila Water Co., Inc. and P7.32 per cubic meter for Maynilad Water Services, Inc., starting January.

“The annual adjustment in water rates in Metro Manila, along with the increase in sin taxes also added to upward price pressures,” Chinabank Research said.

Inflation outlook

In the coming months, inflation is seen to continue settling within the 2-4% target range.

“Looking ahead, inflation will likely remain within target, barring new shocks,” Chinabank Research said.

The BSP projects inflation to average 3.3% this year. Even accounting for risks, it sees inflation potentially hitting 3.4%.

“On a monthly basis, we may see headline inflation bottom out at 2.4% year on year in February and a slight decline from December… as heavyweight CPI housing rental, electricity, water, and gas ease to less than 2%,” Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, said.

“Moving forward, we expect the government’s ongoing efforts to manage rice supply to bring overall inflation down in the next few months,” Mr. Dacanay said.

The government implemented a maximum suggested retail price on imported rice in Metro Manila in late January to address elevated prices.

The within-target inflation outlook will allow the BSP to continue its rate-cutting cycle, analysts said.

‘This will support further monetary policy easing in the Philippines, reducing the pressure on the budgets of households and businesses,” Ms. Tan said.

“This favorable inflation outlook, along with the weaker-than-expected GDP growth in the fourth quarter, supports the case for another interest rate cut by the BSP in its upcoming policy meeting this month,” Chinabank Research said.

Security Bank Corp. Vice-President and Research Division Head Angelo B. Taningco said he expects the BSP to deliver a 25-basis-point (bp) rate cut at its first meeting for the year as inflation is likely within the 2-4% target range in January and fourth-quarter growth was weaker than expected.

Sun Life Investment Management and Trust Corp. economist Patrick M. Ella said the latest growth outturn will be a “larger consideration” for the BSP.

The Philippine economy grew by a slower-than-expected 5.2% in the fourth quarter, bringing full-year 2024 growth to 5.6%. This falls short of the government’s 6-6.5% target.

“We think the BSP will have to cut 25 bps for the first Monetary Board meeting this year. The weakness in consumption and private investments points to the need for support from the monetary policy side at the moment,” Mr. Ella said.

“This may lead to a weaker peso in the near term but the pressing need to support growth is immediate,” he added.

However, analysts also said that the BSP’s easing cycle may be derailed as risks persist.

Ms. Tan said the pace of further easing may be more moderate than last year.

“We’re looking at two quarter-point rate cuts by December, with the first coming through in mid-2025 at the earliest,” she said.

“The BSP will be prudent in monitoring global developments that could reinflate inflation and weaken the strength of the peso,” she added.

Mr. Neri likewise expects the central bank to deliver just 50 bps worth of cuts this year.

“That said, we continue to see risks that could limit the BSP’s rate cuts to just 50 bps this year,” he said.

“If BSP becomes too aggressive with easing, the peso could be subject to sizable exchange market pressure, which, in turn, could fuel inflation expectations.”

The peso has been under pressure in the past few months, sinking to the record-low 59-per-dollar level thrice in 2024.

Ms. Tan expects the Monetary Board to keep rates steady at its Feb. 13 meeting as it will likely remain cautious.

BSP Governor Eli M. Remolona, Jr. has signaled the possibility of up to 50 bps worth of rate cuts this year. – Luisa Maria Jacinta C. Jocson, Reporter

Hot money yields USD 2.1-B net inflow in 2024 — BSP

More short-term foreign investments entered the Philippines in 2024, data from the Bangko Sentral ng Pilipinas (BSP) showed.

Foreign portfolio investments registered with the central bank through authorized agent banks posted a net inflow balance of USD 2.1 billion last year, a turnaround from the USD 248.84-million outflow in 2023.

These investments are called “hot money” because of the ease with which they can enter or leave a jurisdiction, as opposed to foreign direct investment, which is considered less fickle.

Central bank data showed gross inflows jumped by 39.2% to USD 17.93 billion in 2024 from USD 12.89 billion a year ago.

Over half or 54.2% of these investments went to peso-denominated government securities, while the rest were invested in Philippine Stock Exchange (PSE)-listed shares of banks; holding firms; property; transportation services and food, beverage and tobacco.

In 2024, the top investor countries were the United Kingdom, Singapore, the United States, Luxembourg and Hong Kong, accounting for the bulk or 86.3% of investments.

Meanwhile, gross outflows totaled USD 15.83 billion last year, higher by 20.5% from USD 13.14 billion in 2023.

“Majority (or 96%) of these outflows represented capital repatriation while the remaining 4% pertained to remittance of earnings. The US continued to be the main destination of outflows with 49.8% of total,” the BSP said.

In December alone, the hot money balance stood at a net outflow of USD 487.37 million in 2024, more than double (137.5%) the USD 205.18-million outflow in the previous year.

Gross inflows slipped by 1% to USD 1.055 billion during the month from USD 1.065 billion a year ago. It also fell by 43.4% from the USD 1.86-billion inflows recorded in November.

Broken down, 51.7% of these went to peso government securities while the remaining 48.3% were in PSE-listed securities.

In December, inflows came mostly from the United Kingdom, the United States, Singapore, Germany and Ireland, accounting for 76.3% of investment inflows.

On the other hand, gross outflows rose by 21.4% to USD 1.54 billion from USD 1.27 billion. Month on month, it declined by 12.6% from USD 1.76 billion.

“The US remains to be the top destination of outflows, receiving USD 718.88 million (or 46.6%) of total outward remittances,” it said.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the hot money net inflow was due to the start of monetary easing by the US Federal Reserve and BSP.

The US central bank began its easing cycle in September last year, slashing interest rates by a total of 100 basis points (bps) in 2024.

The BSP also kickstarted its rate-cutting cycle in August last year. It reduced borrowing costs by a total of 75 bps by end-2024, bringing the key rate to 5.75%.

This helped “reduce funding costs, spur more investments, employment, trade, and other business activities,” he added.

The country’s recent credit rating upgrades and improvements also supported investor sentiment, Mr. Ricafort said.

In August, Japan-based Rating and Investment Information, Inc. upgraded the Philippines’ investment grade rating to “A-.” — Luisa Maria Jacinta C. Jocson

Car sales to reach 512,000 in 2025

Philippine automotive sales are expected to reach 512,000 units this year amid a more promising macroeconomic outlook, said Toyota Motor Philippines Corp. (TMP).

At a media event on Friday, TMP Chairman Alfred V. Ty said that the prospects for the industry this year are “encouraging.”

He noted the macroeconomic outlook is “reasonably optimistic,” as the gross domestic product (GDP) growth is expected to surpass 6% this year.

The government’s GDP growth target is set at 6-8%.

Mr. Ty said the financial sector “remains sound” as the consumer loans continue to rise.

He also cited the projected growth in overseas Filipino worker remittances and business process outsourcing earnings, as well as a “relatively under control” peso-dollar exchange rate.

“Government infrastructure spending is expected to continue, and election-related spending will trigger incremental economic demand,” he said.

“As a result, we are projecting sales to grow to over 500,000 units, half a million new cars — 512,000 units to be exact — representing a sustained growth of 8%.”

In 2024, the automotive industry sold 467,252 units, up by 8.7% from the 429,807 units sold in 2023, according to a joint report by the Chamber of Automotive Manufacturers of the Philippines, Inc. (CAMPI) and the Truck Manufacturers Association (TMA).

Mr. Ty said that adding the sales from the Association of Vehicle Importers and Distributors, Inc. (AVID) and some Electric Vehicle Industry Development Act (EVIDA) players to CAMPI-TMA’s total pushed industry-wide sales to over 474,000.

“The combined sales of CAMPI, TMA, AVID, and some EVIDA players come to 474,000 units, with 12 motor vehicle manufacturers and assemblers, up to 60 brands, and more than 400 models on the road,” he said.

Mr. Ty said higher car sales translate to more jobs, government revenue, investments and exports.

“As the Philippine auto market continues to expand, I am very much encouraged by the added possibilities this growth brings with it. The auto industry is truly transforming into a major pillar of economic development,” he added.

Increasing sales volume has encouraged automakers to expand in the country.

“I am hoping that we can harness the collective power of every automaker doing business in the country in realizing a more united automotive program to develop the auto industry into a major economic force in support of the nation’s long-term development plans,” he added.

For Toyota, Mr. Ty said the company expects to grow sales by 8% this year.

Last year, TMP sold 218,019 units, up 9% from the previous year, making the Philippines among the 10 largest markets for the Japanese car giant worldwide. Toyota had a 46.66% market share in the Philippines in 2024.

TMP sold 63,007 passenger cars in the Philippines last year, rising 14.7% from 2023. It had a 52.17% share of the passenger car market.

It sold 155,012 commercial vehicles in the Philippines, up 6.8% from the previous year. This accounted for a 44.74% share of the commercial vehicle market.

“It helped us secure jobs for over 69,000 Filipinos in 2024 and realize over $1 billion of exports for the country and contribute PHP 35 billion to government revenues,” Mr. Ty said.

“Our volume sellers will continue to be Vios and Tamaraw. And then Innova will continue to deliver. So, we believe the commercial vehicles will continue to be stronger this year,” he added.

Late last year, the company launched the Next Generation Tamaraw, which has three in-house conversions: utility van, dropside, and cargo.

“We are quite ambitious at this point. Around 20,000 (sales) in a year is our target, initially for Tamaraw,” TMP President Masando Hashimoto said.

If the 8% growth is realized, the company will end the year with around 235,460 units sold.

Meanwhile, Mr. Hashimoto said that the company is looking at expanding its electrified lineup.

“Our main focus has been on hybrid electric vehicles (EVs), with our customers seamlessly adopting them over time, adapting to the hustle and bustle of many Filipinos,” he said.

“Along with the clamor of plug-in hybrid EVs, we see the potential of an expanded electrified lineup, and this may come sooner than you think.” — Justine Irish D. Tabile

ADB OKs USD 500-M loan for Philippine labor market

The Philippines has secured a USD 500-million policy-based loan from the Asian Development Act (ADB) that will fund the government’s labor market programs and reforms aimed at boosting job creation.

The Business and Employment Recovery Program-Subprogram 2 supports government efforts “to achieve inclusive economic growth by equipping the country’s labor force, including vulnerable youth, with the skills required to meet evolving industry needs,” the ADB said in a statement.

The program will also aim to raise women’s participation in the workforce through technical and vocational education and training, as well as provide better access to opportunities.

Under the program, the government is targeting to increase formal employment in the private sector by around 600,000 to 700,000 jobs annually. This would help raise the share of private sector jobs to total employment to 51%, versus 49% in 2019.

“While job recovery in the Philippines has been encouraging in the post-COVID-19 (coronavirus disease 2019) period, the quality of jobs remains a critical concern, with many workers still facing challenges such as underemployment, informality, and limited access to decent work opportunities,” ADB Country Director for the Philippines Pavit Ramachandran said.

The program also seeks to provide skills training for 5,000 workers through private sector-led programs such as the SkillsUpNet Philippines.

The government also hopes to boost the number of job placements through public employment service offices in local government units (LGUs) by as much as 120,000 annually.

It also wants more LGUs to implement the JobStart Philippines skills training program for the youth.

Latest data showed the unemployment rate dropped to 3.2% in November, translating to 1.66 million unemployed Filipinos. The November jobless rate was lower than 3.9% in October and 3.6% in the same month in 2023.

For the first 11 months of 2024, the jobless rate averaged 3.9%, easing from 4.5% during the same period in 2023.

Peso could top DBCC assumptions until 2026 — BSP

The peso-dollar exchange rate could breach the government’s assumptions from this year to 2026 amid expectations of slower rate cuts by the US Federal Reserve, the Bangko Sentral ng Pilipinas (BSP) said.

“The exchange rate could settle slightly above the Development Budget Coordination Committee’s (DBCC) assumptions for 2025 and 2026,” it said in its latest Monetary Policy Report.

The DBCC expects the peso to trade at around 56-58 per dollar this year and 55-58 in 2026.

“This projection is due to the slower pace of monetary policy easing by the United States Federal Reserve (US Fed) and recent near-term movements in the peso,” the central bank said.

The US central bank held interest rates steady on Wednesday and Federal Reserve Chair Jerome H. Powell said there would be no rush to cut them again until inflation and jobs data made it appropriate, Reuters reported.

After the Fed lowered rates three times in the latter part of last year, inflation has largely moved sideways in recent months, but “remains elevated,” the central bank’s policy-setting Federal Open Market Committee, said in a statement after a unanimous decision to keep the benchmark overnight interest rate in the current 4.25%-4.5% range.

Emerging from their first policy meeting during President Donald J. Trump’s second term in the White House, Mr. Powell said Fed officials are “waiting to see what policies are enacted.”

As a result, Fed fund futures still imply around 48 basis points (bps) of easing this year, compared to 49 bps earlier in the week. The next move is not expected until June, when the probability of a cut is put at 73%.

The BSP expects the Fed to deliver up to 75 bps worth of cuts this year and 25 bps for 2026.

The central bank said the peso depreciated in October and November “due to the broad strengthening of the US dollar after the US Fed signaled that there was no urgency to ease policy rates further.”

In 2024, the peso closed at its record low of P59 thrice (on Nov. 21, Nov. 26, and Dec. 19.) It has yet to breach this all-time low, which was first set in October 2022.

“Concerns about the inflationary impact of (US President) Donald J. Trump’s economic policies also weighed on the peso,” the BSP added.

Mr. Trump has proposed several policies that could stoke inflation, such as stricter import tariffs and tighter immigration measures.

He has pledged tariffs as high as 60% on China, 25% on Mexico and Canada and an up to 10% universal tariff.

The BSP said the recent currency weakness was also influenced by slower gross domestic product (GDP) growth in the third quarter, higher outstanding debt, a wider trade and current account deficit, as well as political uncertainty.

“Nonetheless, the peso’s depreciation was partly tempered by sustained structural FX inflows from foreign direct investment and foreign portfolio investment, and higher overseas Filipinos remittances,” it added. — Luisa Maria Jacinta C. Jocson

Stock tax cut seen to boost market appeal

A recently passed bill that will cut the tax on stock transactions to 0.1% from 0.6% is expected to make the Philippine stock market more appealing to investors, according to economists, who also cited the need for the government to educate Filipinos on how to invest.

“The lower tax is a welcome development, but more reforms are needed to broaden and deepen the stock market in the Philippines,” Enrico P. Villanueva, a senior lecturer at the University of the Philippines Los Baños Economics Department, said in an X message.

“Education and proper orientation about the market and its potential returns are needed. There have to be investments in education and time as well.”

He added that a lower tax on stock purchases would likely boost profit margins for Philippine stock market participants.

The Senate on Monday approved on final reading Senate Bill No. 2865, or the Capital Markets Efficiency Promotion Act, which aims to make the country’s capital market more competitive with its regional peers.

In the 2024 Capital Market Review of the Philippines published by the Organization for Economic Cooperation and Development (OECD), the number of newly listed firms and capital raised through initial public offerings (IPO) in the Philippines have been the lowest in the Association of Southeast Asian Nations (ASEAN) since 2000.

The cost of listing on local stock exchanges varies significantly across different countries, and the Philippines is no exception. When comparing the initial listing fees on the main equity markets, the Philippines stands out with a fee of 0.10% of the market capitalization for companies with a market cap of USD 150 million, according to the OECD report. This is relatively high compared to its regional peers: Indonesia and Malaysia both charge 0.01%, Thailand charges 0.05%, and Singapore is slightly higher at 0.06%.

For equity markets dedicated to growth companies, such as those with a market capitalization of USD 10 million, the Philippines charges 0.10% of the market cap. This is comparable to Indonesia at 0.11% and Malaysia at 0.12%, while Singapore charges 0.24% and Thailand is lower at 0.03%.

Under the bill, a final tax rate of 10% will be imposed on cash and property dividends received from a local corporation, joint stock company, mutual fund, or on the share of an individual in the net income of the entity.

The House of Representatives passed a counterpart bill in March, which also seeks to lower the tax on dividends for non-resident investors to 10% from the current 25%.

“The Philippines is currently one of the more expensive markets in terms of transaction costs,” Eleanor L. Roque, tax principal of P&A Grant Thornton, said in a Viber message.

“So, lowering the stock transaction tax is a step in the right direction to making our stock market more attractive and competitive to its peers in the region.”

Based on a forecast by the Philippine Stock Exchange, the lowered 0.1% stock transaction tax would boost stock trading to PHP 4.9 trillion by 2029.

On Tuesday, the value of shares traded on the local bourse rose to PHP 5.64 billion with 1.53 billion issues changing hands from PHP 5.44 billion with 1.14 billion shares traded on Monday.

Senator Sherwin T. Gatchalian, who sponsored the Senate bill, said the bill’s passage would make it easier for Filipinos to invest in the stock market and spur growth in the Philippine capital market.

But Leonardo A. Lanzona, who teaches economics at the Ateneo de Manila University, said the move would likely only favor rich Filipinos who can afford to participate in the capital market.

“The lower income classes carry the burden of the indirect taxes which dominate the country’s revenue structure,” he said in a Facebook Messenger chat.

“Instead of imposing new taxes in order to facilitate fiscal consolidation, the Senate took the opposite route by lowering taxes.”

Under the measure, capital gains from the sale, exchange, barter, or disposition of shares of stock not traded on the Philippine Stock Exchange will be subject to a 15% tax on net capital gains during a taxable year.

It will also set a 15% tax rate on net capital gains during a taxable year on shares of stock in domestic and foreign corporations.

Resident foreign corporations and their regional operating headquarters will be required to pay a minimum corporate income tax of 10% on their taxable income.

But foreign corporations not engaged in trade or business in the Philippines shall pay a tax of 25% of their gross income during each taxable year.

The bill also imposes a final tax of 20% on interest or monetary benefits earned from any currency bank deposit, trust fund, or similar arrangement.

“Cutting transaction taxes will also just boost financial profits without really leading to greater investments in the real economy,” Ibon Foundation Executive Director Jose Enrique “Sonny” A. Africa said in a Viber message.

“A better direction for tax reform would be a billionaire wealth tax and more progressive taxation on high incomes to generate public revenues for investment in social services and micro, small, medium enterprises.” – John Victor D. Ordoñez, Reporter

Inflation likely within target until ’26

Private sector economists expect inflation to remain within the central bank’s 2-4% target from this year to 2026, the Bangko Sentral ng Pilipinas (BSP) said.

The BSP’s latest survey of external forecasters in its Monetary Policy Report showed that analysts’ mean inflation forecast for this year stood at 3.1%, lower than the central bank’s 3.3% baseline projection.

The survey showed an 82.6% likelihood that inflation will settle within target this year and an 83.5% probability for 2026.

“Inflation expectations continue to be well-anchored. Risks are broadly balanced, with headline inflation expected to stay low and manageable over the medium term.”

For 2026, economists expect inflation to average 3.2%, also below the BSP’s 3.5% forecast.

Headline inflation averaged 3.2% in 2024, well within the target band. January inflation data will be released on Feb. 5.

The survey showed the within-target inflation outlook is mainly driven by easing rice and oil prices.

“Downside risks to the inflation outlook are seen to emanate largely from lower rice prices, amid the implementation of Executive Order (EO) No. 62 and lower oil prices,” the BSP said,

President Ferdinand R. Marcos, Jr. last June signed EO 62, which slashed rice import tariffs to 15% from 35% until 2028, citing the need to curb rice prices.

Rice inflation has slowed to 0.8% in December from 5.1% in November and 19.6% a year prior. Rice is typically the biggest contributor to overall inflation.

Global crude oil prices are seen to ease further, the BSP said.

“Futures prices have declined due to market expectations of higher US oil production and expectations of weaker global demand as well as the likelihood of global oversupply.”

“This in turn led to a delay in the anticipated increase in oil production by the Organization of the Petroleum Exporting Countries and other partner countries (OPEC+).”

However, the central bank warned that inflation could breach the 2-4% band if Dubai crude oil prices average above $90 per barrel from this year to 2026.

The Development Budget Coordination Committee expects Dubai crude oil to range from $60 to $80 per barrel from 2025 to 2026.

“These oil price scenarios consider only direct effects and do not incorporate potential second-round effects on transport fares, food prices, and wage increases.”

The surveyed analysts also flagged upside risks to the inflation outlook such as supply disruptions due to geopolitical tensions and adverse weather conditions.

“The potential spike in electricity rates, higher-than-expected wage adjustments, and protectionist US trade policies were also identified as upside risks,” it added.

The BSP also noted the possibility of rising electricity rates in the coming months.

“In July 2023, the Supreme Court nullified the previous cap on Wholesale Electricity Spot Market (WESM) prices for November 2013 and December 2013. Electricity rates could rise due to the potential increase in generation charges being passed on to consumers.”

The central bank earlier warned that the balance of risks to the inflation outlook remain tilted to the upside for this year and the next.

The BSP expects inflation to settle at the midpoint of the 2-4% target until the first half of 2025, before accelerating to the upper end of the target from the second half of 2025 to the first half of 2026.

Inflation will ease closer to the midpoint of the target by the second half of 2026, driven by declining global commodity prices, it added.

Further easing

Meanwhile, analysts surveyed by the BSP also expect further monetary policy easing for this year.

“For 2025, the general view is that the BSP will ease its monetary policy stance by a range of 50-100 basis points (bps). Meanwhile, analysts have mixed views on the target reverse repurchase (RRP) rate for 2026,” the BSP said.

Last year, the Monetary Board cut rates by a total of 75 bps, bringing the key rate to 5.75% by end-2024.

“On balance, there is scope for measured monetary policy easing given the within target inflation, manageable underlying price pressures and well-anchored inflation expectations. However, upside risks to inflation warrant close monitoring,” the BSP said.

“A further cut in the policy rate will help reinforce the impact of the prior monetary easing on market interest rates, lending activity, and aggregate demand.”

BSP Governor Eli M. Remolona, Jr. has said there is room to ease further as the current policy rate is still in “restrictive territory.” However, the central bank is likely to deliver further rate reductions in “baby steps.”

‘Below potential’

Meanwhile, the BSP expects the Philippine economy to “grow below potential” over the near term due to subdued demand. The government is targeting 6-8% for 2025 to 2026.

“The outlook for domestic growth indicates a more subdued pace of economic activity up to 2026,” it said.

The BSP expected economic growth in 2024 to settle slightly below the government’s 6-6.5% target, after a weaker-than-expected third-quarter gross domestic product (GDP) print.

Fourth-quarter and full-year GDP data will be released today (Jan. 30).

“However, GDP growth is seen to modestly improve and settle close to the low end of the targets for 2025 and 2026,” the BSP said.

“The decline in global oil prices, the easing of BSP’s monetary policy, and the reduction in the reserve requirement ratio are seen to support domestic economic activity.”

Domestic demand is also seen to “remain firm but subdued.” — Luisa Maria Jacinta C. Jocson

PDEx to launch gov’t bond forward contracts

The Philippine Dealing and Exchange Corp. (PDEx) will introduce the country’s first peso-denominated interest rate hedge next week as part of efforts to boost activity in the fixed-income market.

PDEx President and Chief Executive Officer Antonino A. Nakpil said the bond trading platform will launch a new derivative product called government bond forward contracts, which will be initially available to banks.

“We’re launching that (government bond forward contracts) next week, Monday (Feb. 3). We’re excited about that because that’s the first purely Philippine peso-denominated interest rate hedge,” he told reporters on the sidelines of a recent Financial Executives Institute of the Philippines event in Makati City.

“It will be available to the banks first, the inter-dealer first, and then later on to clients who may find that useful,” he added.

Mr. Nakpil previously said that the Securities and Exchange Commission approved the market framework and infrastructure to offer the trading of government bond forward contracts on Jan. 2.

According to Mr. Nakpil, bond forward contracts, which designate a fixed price for a debt security on a future date and let market participants hedge interest rate risks, will help provide a new dynamic to the country’s fixed-income markets.

“It’s a derivative, it’s a new thing. It will be settled in a way that is unique. We’re not creating a futures contract like in the traditional sense. It is a forward expression of what has been established as a method of hedging in the futures markets. We’re using an over-the-counter forward expression of that,” he said.

“It’s a first. We’ll see if it works. We think it will work. It’s not a futures contract so there’s no leverage on it,” he added.

Mr. Nakpil said the new product is not meant for retail investors due to its complicated nature.

“We’ll allow only the dealers and then qualified investors. Basically, professionals only. This is not meant for the retail investors.” Mr. Nakpil said.

“Some contracts are not meant for retail investors, especially if there’s leverage involved. Once you involve leverage like futures contracts, it becomes complicated,” he added.

Sought for comment, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message that this will help further develop capital markets in the country.

“This will give greater flexibility to manage interest rate risk in the local market and would give market players the ability to at least hedge their market risks or take trading positions based on their view on interest rate direction,” Mr. Ricafort said.

He noted this would allow local markets to adopt standards in more developed markets to cater to the demands of investors.

The PDEx is aiming to have P600 billion worth of corporate bond listings this year.

The bond trading platform saw P360 billion in 2024, missing its target of P400 billion.

However, Mr. Nakpil said the target could be changed due to geopolitical risks.

“We’re not sure of the P600 billion. We’ll be refocusing. We’ll see whether it’s reachable this year,” he said. — Revin Mikhael D. Ochave

Consumption recovery seen to fuel Philippine growth

A recovery in household consumption could drive Philippine gross domestic product (GDP) growth to the 6% range this year, HSBC Global Research said.

“We think household consumption in the Philippines should return, bit by bit, to its regular levels, bringing overall gross domestic product growth back to the range of 6% or more,” HSBC economist for ASEAN Aris D. Dacanay said in a report.

The Philippines’ GDP expanded by 5.2% in the third quarter, its weakest growth in five quarters. This brought the nine-month growth average to 5.8%.

The economy likely grew by 5.8% in the fourth quarter and 5.7% for the full-year 2024, according to a BusinessWorld poll of 18 economists last week. Fourth-quarter and full-year GDP data will be released today (Jan. 30).

The government is targeting 6-6.5% growth for 2024 and 6-8% for 2025 to 2026.

“Consumption should also be boosted over the near term with the recent depreciation in the Philippine peso against the US dollar boosting the purchasing power of every US dollar remitted.”

HSBC also cited a stronger recovery in non-durable consumer goods.

“Non-durable spending may be improving fast, but spending on big-ticket items, such as cars and real estate, will need more time to return to normal.”

“These goods are large expenditures by nature, potentially requiring households to acquire credit. To optimize one’s borrowing costs, households may be waiting for the central bank’s easing cycle to end before eventually deciding whether to borrow money or not.”

Mr. Dacanay said household consumption is unlikely to be affected by the Trump administration’s aggressive tariff policy.

“Remittances, demographics, and services exports — three sectors of the economy that drive consumption — are subject to minimal tariff risks, at best. So, to monitor the Philippine economy in 2025, watching household consumption will be key,” he said.

“The economy does have some layer of insulation; household consumption remains the country’s main growth driver, and no other economy can put a tariff on consumption.”

Markets are pricing in the impact of US President Donald J. Trump’s aggressive tariff proposals. He has pledged to impose tariffs of up to 60% on China, 25% on Canada and Mexico as well as a 10% universal tariff.

Mr. Trump also said he planned to slap tariffs on imported computer chips, pharmaceuticals and steel as part of efforts to encourage manufacturers to make these products in the US.

“With all the headlines on trade and tariffs, there is a sense of relief that the Philippines is the least affected in ASEAN (Association of Southeast Asian Nations),” Mr. Dacanay added.

HSBC noted that household consumption has slowed amid elevated inflation and interest rates, which dampened purchasing power.

Private consumption grew by 5.2% in the third quarter of 2024, improving from 4.7% in the second quarter.

“But all this is already behind us. Inflation is back to within the central bank’s 2-4% target band, while monetary policy is amidst its gradual easing cycle,” Mr. Dacanay said.

Headline inflation averaged 3.2% in 2024. The BSP also expects inflation to remain within the 2-4% target band from this year to the next, as its baseline projections are at 3.3% and 3.5% for 2025 and 2026, respectively.

The central bank began its rate-cutting cycle in August last year, delivering a total of 75 basis points (bps) worth of cuts as of end-2024. This brought the key rate to 5.75%.

The BSP has signaled further rate cuts this year.

HSBC expects the central bank to bring down the benchmark rate to 5% by the third quarter of 2025. — Luisa Maria Jacinta C. Jocson

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