BSP expected to end year with 3rd rate cut

A THIRD-QUARTER economic slowdown and within-target inflation will likely prompt monetary authorities to cut key interest rates by another 25 basis points (bps) this Thursday, analysts said.

All but one of nine economists polled by The Manila Times said the Bangko Sentral ng Pilipinas’ (BSP) policymaking Monetary Board would close out 2025 with a third rate cut.

The BSP’s benchmark rate currently stands at 6.0 percent following two 25-bps reductions in August and September.

Policymakers will want to prop up the economy after gross domestic product (GDP) growth slowed markedly to a below-target 5.2 percent in the third quarter from 6.4 percent in April-June, the analysts said.

Stable consumer prices — inflation rose to 2.5 percent in November due to the impact of recent storms, but is still expected to end the year within the 2.0- to 4.0-percent target range — also points to another rate cut, they added.

One factor weighing against further easing, however, is that a fresh rate cut could exacerbate the weak peso, which last month twice returned to a record low of P59 to the dollar and closed 23 centavos weaker on Friday at P58.47:$1

Pantheon Macroeconomics economist Miguel Chanco said the weaker-than-expected GDP result, along with stable inflation, was likely to keep the BSP in easing mode.

Moody’s Analytics economist Sarah Tan said that price stability could encourage monetary authorities to order another 25-bps cut, but added that a weak peso might delay the move.

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

Metrobank Research said that since inflation was likely to remain within target, the BSP has “room to continue its monetary easing to further stimulate consumption and investment expenditure and drive higher growth next year.”

“We forecast the BSP to cut the reverse repurchase rate by 25 bps to 5.75 percent. We also project BSP to carry out three rate cuts in 2025,” it added.

Bank of the Philippine Islands senior economist Emilio Neri held the same view, saying the central bank could lower its rates further.

While a pause remains possible, recent economic and external developments support monetary easing, he added.

The inflation outlook for 2025 also strengthens the rate cut case, Neri said, noting that despite a faster rise in November due to typhoon-driven vegetable price hikes, cheaper rice would keep inflation within target.

He noted that additionally, economic activity in the Philippines had slowed to below the government’s target, increasing pressure on monetary officials to cut interest rates.

Economic managers earlier this month narrowed the outlook for 2024 GDP growth to 6.0-6.5 percent, saying that the previous upper end of 7.0 percent was no longer achievable.

Year-to-date growth remains below target at 5.8 percent and many observers expect a 2024 result below 6.0 percent. The government, however, remains optimistic that the lower end of the revised goal will be met.

“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,” Neri said.

“With market participants now expecting a 96-percent chance of the Federal Reserve cutting rates by 25 basis points on December 18, the local monetary authorities may be less worried about reducing rates prematurely,” he said.

Chinabank Research also said that the US central bank was widely expected to cut its policy rate by 25 basis points this week, potentially providing the BSP with more flexibility to continue easing monetary policy.

“The latest US inflation report reinforced expectations of a 25-bp rate cut from the Fed next week,” it 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,” Chinabank Research added.

The Fed will be holding its last policy meeting for the year on Dec. 17-18, ahead of the BSP’s that is set for Dec. 19.

Union Bank of the Philippines chief economist Ruben Carlo Asuncion, meanwhile, also said that inflation remaining within target would be a key reason for another rate cut.

If the Fed delivers a 25-basis-point cut, Asuncion said that this would further encourage the BSP to lower key interest rates.

Rizal Commercial Banking Corp. chief economist Michael Ricafort and HSBC Global Research economist Aris Dacanay also expect the BSP to continue easing.

Philippine monetary authorities will likely match future Fed rate cuts going forward, they added.

Emmanuel Lopez from the University of Sto. Tomas Graduate School was the only analyst to say that monetary authorities could choose to pause during their final meeting for 2024.

This will be due to “several factors like the fluctuating prices of oil, electricity and the depreciating value of the local currency against the dollar,” he said.

“Despite the slowdown in inflation, consumer products remain volatile in anticipation of the holidays, where demand pushes the prices … upward…,” Lopez added.