Within-target inflation may prompt further rate cuts

The Bangko Sentral ng Pilipinas’ (BSP) rate-cutting cycle will be supported by expectations of inflation settling well within target this year, analysts said.

“The low inflation print for January indicated that price pressures were still generally benign and manageable, which supports expectations for inflation to remain within the BSP’s 2-4% target going forward,” Chinabank Research said in a report.

“This should provide room for further interest rate cuts by the BSP,” it added.

The Philippine Statistics Authority on Wednesday reported headline inflation remained steady at 2.9% in January, within the central bank’s 2-4% target band.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco expects inflation to average 2.7% this year amid “increasingly clear bottoming-out in official core inflation.” 

“Our revised yearly forecast implies that headline inflation should remain relatively steady from here on out, ranging between 2.5% and 3% for the remainder of this year, comfortably within the BSP’s target range,” he added.

The BSP projects inflation to settle at 3.3% this year. It earlier said inflation will likely “remain anchored to the target range over the policy horizon.”

However, risks to the inflation outlook continue to lean towards the upside, it said. Accounting for risks, inflation could average 3.4% this year.

“Looking ahead, while inflation for 2025 is expected to remain within the BSP target range, potential risks such as local weather disturbances and geopolitical tensions must be closely monitored,” Manulife Investment Management Head of Fixed Income Jean O. de Castro said.

Chinabank Research likewise said upside risks to the inflation outlook include adverse weather and geopolitical conflicts, which would “continue to support a cautious approach to policy easing.”

Despite this, analysts expect the BSP to deliver another rate cut at its first policy review for the year next week (Feb. 13).

“This favorable inflation outlook, along with the Philippine economy’s weaker-than-expected performance in both the fourth quarter and full-year 2024, reinforces our view that the BSP will likely cut interest rates by 25 basis points (bps) at its policy meeting next week,” Chinabank said.

The Philippines’ gross domestic product (GDP) grew by a weaker-than-expected 5.2% in the fourth quarter.

This brought full-year 2024 growth to 5.6%, short of the government’s 6-6.5% target.

BofA Securities economist for the Philippines Jojo Gonzales said they expect the central bank to cut rates by 25 bps next week.

“However, if inflation remains stubbornly high in February or March, our expectation for an April cut in policy rates could be at risk,” Mr. Gonzales said.

“Our expectation is for a 25-bp rate cut in February and another 25-bp cut in April, while the US Fed stays on hold,” he added.

BSP Governor Eli M. Remolona, Jr. has said a rate cut is still on the table for its meeting next week.

For 2025, Mr. Remolona said the central bank could cut by a total of 50 bps this year, as 75 bps or 100 bps may be “too much.”

The Monetary Board began its easing cycle in August last year, reducing borrowing costs by a total of 75 bps by end-2024.

Ms. De Castro said that the start of monetary easing will help support economic growth.

“Furthermore, the delayed effects of the BSP’s 75-bp monetary easing in the previous year, alongside expected further rate cuts in 2025, are likely to support economic expansion,” she said.

“By fostering a conducive investment environment and maintaining prudent fiscal and monetary policies, the Philippine economy can work toward achieving its growth objectives.” – Luisa Maria Jacinta C. Jocson, Reporter