By Luisa Maria Jacinta C. Jocson, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) lowered its key rate for a third straight meeting on Thursday but signaled the possibility of fewer cuts in 2025.
The Monetary Board on Wednesday reduced the target reverse repurchase rate by 25 basis points (bps), bringing the key rate to 5.75% from 6%.
This was also in line with the expectations of 13 out of 16 analysts surveyed in a BusinessWorld poll last week.
Rates on the overnight deposit and lending facilities were also lowered to 5.25% and 6.25%, respectively.
The central bank has now slashed rates by a total of 75 bps this year since it began its easing cycle in August.
“Looking ahead, the Monetary Board will maintain a measured approach to monetary policy easing to ensure price stability conducive to sustainable economic growth and employment,” BSP Governor Eli M. Remolona, Jr. said.
He said that inflation is projected to stay within the 2-4% target range over the policy horizon.
“On balance, the within-target inflation outlook and well-anchored inflation expectations continue to support the BSP’s shift toward less restrictive monetary policy,” he said.
However, Mr. Remolona said the balance of risks to the inflation outlook continues to remain tilted to the upside, citing “potential upward adjustments in transport fares and electricity rates.”
“The impact of lower import tariffs on rice remains the main downside risk to inflation,” he added.
The central bank raised its baseline inflation forecast to 3.3% for 2025 (from 3.2%) and 3.5% for 2026 (from 3.4%). For this year, it also upwardly revised its forecast to 3.2% from 3.1% previously.
Meanwhile, the risk-adjusted forecasts were also increased to 3.2% this year (from 3.1%) and 3.4% for 2025 (from 3.3%). The risk-adjusted projection for 2026 was kept at 3.7%.
Both baseline and risk-adjusted forecasts remain within the BSP’s 2-4% target band.
“Nonetheless, the monetary authority will continue to closely monitor the emerging upside risks to inflation, notably geopolitical factors,” Mr. Remolona added.
Meanwhile, the BSP also expects domestic demand to “remain firm but subdued.”
“Private domestic spending is expected to be supported by easing inflation and improving labor market conditions. However, downside risks in the external environment could materialize and temper economic activity and market sentiment,” he said.
STILL ‘ON THE TIGHT SIDE’
Asked how much the BSP will cut in 2025, Mr. Remolona said: “In our discussion today, there was a sense that maybe 100 bps over 2025 would be too much, but zero would also be too little.”
He earlier said they could reduce rates in the 100-bp range for 2025, though not necessarily at every meeting or every quarter.
“Even with the 75 bps, from all our estimates, we’re still somewhat on the tight side. That for us is a kind of insurance. The reason we’re cutting in baby steps is because we’re not absolutely sure about inflation,” he said.
“We still worry that inflation might start to rise again. By cutting in baby steps, at this point, we’re still somewhat tight. That’s kind of insurance against a possible increase in inflation.”
If the data are not too “surprising,” the Monetary Board can continue its rate-cutting cycle, Mr. Remolona said.
“If there’s a big surprise then we may change the direction of monetary policy. But if the surprises are small enough then there’s no reason to really change the direction that we’re taking.”
PESO
Meanwhile, Mr. Remolona said the BSP is monitoring the peso and its potential impact on inflation.
“We are concerned about the pass-through. The pass-through tends to become important when there’s enough of a depreciation. So, there’s kind of a threshold and we’re still trying to refine our estimates of that threshold,” he said.
The peso closed at P59 per dollar on Thursday, weakening by one centavo from its P58.99 finish on Wednesday.
So far this year, the local currency has hit an all-time low thrice, including on Nov. 26 and on Nov. 21.
Analysts said that expectations of within-target inflation would allow the BSP to continue easing next year.
“The headline rate is currently only just above the 2% lower bound, and we reckon that it will largely continue to hug this level over the coming 12 months — barring an unexpected supply shock to prices — providing the (Monetary) Board with more room to ease policy,” Pantheon Chief Emerging Asia Economist Miguel Chanco said in a report.
Pantheon expects annual inflation to ease to 2.4% next year from 3.2% this year. It also expects 100 bps worth of reductions next year.
“The central bank may have room to cut interest rates further in the first half of 2025, supported by a favorable inflation outlook,” Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said.
“Barring any unforeseen supply shocks, inflation can remain within the BSP’s target range next year.”
Mr. Neri also cited expectations of further easing by the US Federal Reserve’s latest dot plot.
“The behavior of USD/PHP may remain manageable if the BSP’s pace of rate cuts aligns reasonably with the Fed’s trajectory,” he added.
The Fed on Wednesday lowered interest rates but signaled fewer rate cuts in 2025.
However, Mr. Neri noted that the BSP is unlikely to cut rates aggressively next year as “global price risks could thwart outsized monetary easing actions.”
The Monetary Board could deliver up to 50 bps worth of cuts for next year, he said.
“While the first half of the year may present opportunities, cutting rates in the latter half could be more challenging, as the Federal Reserve’s outlook could shift in response to President Trump’s potentially inflationary policies.”
“In an adverse scenario, higher tariffs and mass deportations may re-ignite inflation in the US, which could force global central banks to pivot to monetary tightening,” he added.
