More interest rate cuts seen in Q4

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is expected to deliver more rate cuts in the fourth quarter following the lower-than-expected headline inflation print in August, analysts said.

In a report, Nomura economists Euben Paracuelles and Nabila Amani said inflation returning to a declining path reinforces their view that the BSP will further cut rates this year.

“We reiterate our forecast that the BSP will cut by 25 basis points at each of the last two meetings of the year, i.e., in October and December,” Paracuelles and Amani said.

Nomura Global Markets Research also expects the BSP to cut rates in the first three meetings in 2025 before keeping rates on hold from there.

“This would bring the key rate to five percent by May 2025, or a total of 150-basis-point cuts in this cycle. The Fed’s rate cuts, which our US team expects to begin in September, also support further easing by the BSP,” they said.

Inflation sharply eased to 3.3 percent in August, the lowest in seven months, from a nine-month high of 4.4 percent in July. It ended six straight months of monthly acceleration, settling within the BSP’s two to four percent target.

According to Paracuelles and Amani, the decline in August was led by food inflation, which fell to 2.3 percent from 3.9 percent a month ago. This was driven by lower rice inflation of 14.7 percent from 20.9 percent previously due to base effects.

“But in sequential terms, rice prices have dropped only slightly, suggesting the pass-through from the cut in rice import tariffs, which was effective in July, has yet to materialize,” they said.

Taking this into account, Nomura raised its average inflation forecast for this year to 3.1 percent from 2.8 percent despite the decline in August inflation.

“Our revision mainly reflects the fact that the pass-through from the cut in rice import tariffs did not materialize in August, in contrast with our previous assumption,” they said.

“Still, our new forecast pencils in inflation falling to around two percent by the fourth quarter, as the impact of the rice tariff cuts becomes more evident from October, based on our revised assumption of the timing of the pass-through effects.”

Meanwhile, Aris Dacanay, economist for ASEAN at HSBC, said inflation risks for September are tilted to the upside amid the impact of food supply disruptions from Typhoon Enteng (international name Yagi).

Typhoon Yagi just left the archipelago and damaged agricultural lands while claiming lives.

Like July inflation, we might also see a sharp month on month jump for the month of September as Typhoon Yagi takes a toll on food supply,” he said.

Dacanay said that the BSP may pause in October and cut by 25 basis points only in December, which would bring the key interest rate to six percent by year-end.

He said the gross domestic product (GDP) data for the third quarter would be the main determinant of how fast the BSP will ease monetary policy.

“Since the GDP data will only come out after the October Monetary Board meeting, we think the BSP will likely stick to what it telegraphed - just one 25bp rate cut for 2024,” Dacanay said.

“In addition, the inflationary impact of Typhoon Yagi -- which we will only find out the week before the October rate-setting meeting -- may build a case of a temporary rate pause, unless rice prices are finally unhinged,” he said.

The Monetary Board cut its key interest rate by 25 basis points to 6.25 percent last month. Before the cut, the BSP kept policy rates unchanged for six straight meetings since November 2023.

The BSP will meet on Oct. 17 and Dec. 19 to discuss policy.