BSP Governor Eli Remolona Jr. —Contributed photo
The Bangko Sentral ng Pilipinas (BSP) is widely expected to resume trimming interest rates later this week, although the market would unlikely see an outsized easing despite the headroom provided by a mild inflation and the beginning of a broader global cutting cycle.
Ten economists surveyed by the Inquirer projected the powerful Monetary Board (MB) to slash the benchmark rate anew once they convene on Oct. 16, one of the last two meetings of the policymaking body for 2024.
At the same time, all analysts in the poll expected the MB to opt for a modest quarter-point cut, citing the need to be cautious amid potential risks that could upset the inflation outlook. Such a move, if realized, would bring the benchmark rate that banks typically use as a guide when charging interest on loans to 6 percent.
For Emilio Neri Jr., lead economist at Bank of the Philippine Islands, an aggressive monetary easing “isn’t necessary” as latest economic data pointed to solid growth.
He added a “more conservative” transition to easier financial conditions may be necessary to avoid pressuring the peso and to help maintain a healthy external position.
“Maintaining a positive interest rate differential helps the BSP rebuild its foreign reserves,” Neri said.
“It also helps in maintaining a certain degree of stability in the foreign exchange market, which is necessary to avoid meaningful pass-through to inflation or, on the other extreme, currency competitiveness,” he continued.
Data showed inflation softened to 1.9 percent in September, coming in below market expectations and the BSP’s own forecast range of 2 percent to 2.8 percent for last month. Much of the slowdown came from easing food price growth, which sharply moderated to 1.4 percent.
That put the year-to-date headline inflation rate to 3.4 percent, sitting comfortably within the 2- to 4-percent target range of the central bank. As it is, the BSP is now at a point where it has to undo its most forceful tightening actions in two decades, which had sent the benchmark rate to its highest level in 17 years to tame stubbornly high inflation.
Cutting borrowing costs is necessary amid market predictions that the economy may grow below the government’s target for this year after consumption showed signs of weakening.
But unlike in the United States, where a slowing job market had prompted the US Federal Reserve (Fed) to deliver an outsized 50-basis point (bp) cut in September, the BSP entered its easing era in August with the traditional quarter-point reduction to the policy rate, which is now at 6.25 percent.
Moving forward, Governor Eli Remolona Jr. said the central bank would take “baby steps” until the key rate falls to 4.5 percent by the end of 2025, suggesting that monetary authorities would unlikely resort to jumbo cuts that may stir up market fears that the economy is headed for a hard landing.
But Michael Ricafort, chief economist at Rizal Commercial Banking Corp., did not rule out the possibility of a jumbo 50-bp cut at the MB meeting on Wednesday, citing the need to be in “lockstep” with the Fed.
John Paolo Rivera, senior research fellow at Philippine Institute for Development Studies, also believed that a half-point reduction is not entirely off the table.
“I personally do not see it yet at 100 bps as the inflationary deceleration may be transitory given that holiday season is fast approaching, putting an upward pressure on inflation if supply side constraints are not mitigated,” Rivera said.
Separately, Chinabank Research called for a “small” reduction, saying the BSP needed to be mindful of narrowing chances of another supersized cut in the United States, a development that sank the peso back to 57-level last week.
“A 25-bp cut by the BSP would keep the interest rate differential between the BSP’s and the Fed’s policy rate at 100 bps, thereby exerting less downward pressure on the peso,” Chinabank said.