From inflation control to economic support
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is widely expected to lower its benchmark interest rates by 25 basis points (bps) at its monetary policy meeting on Feb. 13 as policymakers would likely shift focus from inflation control to supporting economic growth.
Analysts from major financial institutions point to the weaker-than-expected gross domestic product (GDP) growth in the fourth quarter of 2024, alongside a stable inflation environment, as key justifications for the anticipated rate cut.
Jun Neri, lead economist at the Bank of the Philippine Islands, said the BSP would likely lower the target reverse repurchase rate (RRP) by 25 bps to 5.5 percent on Thursday.
“The central bank might use the slower-than-expected growth last quarter as the primary justification for the cut, along with a stable inflation environment that allows the central bank to focus more on boosting the economy,” he said.
The Philippine economy expanded by 5.2 percent year-on-year in the final quarter of 2024, falling short of expectations. It brought full-year GDP to 5.6 percent last year, below the governement’s six to 6.5 percent growth target.
The recent stability of the peso against the dollar will also provide the BSP more room to consider a rate cut as the local currency has strengthened following the US government’s decision to postpone tariffs against Canada and Mexico.
“While a rate cut could exert pressure on the peso, improving market sentiment may mitigate this. Moreover, the BSP might be open also to a higher exchange rate as long as inflation remains within target,” Neri said.
Citi economist Nalin Chutchotitham also expects the BSP to move ahead with a 25-bp rate cut next week, citing the moderate inflation outlook and weaker 2024 growth.
“Timing of subsequent rate cuts remains data-dependent, although we maintain our calls for June and August, as the monetary policy stance remains tight,” she said.
The consumer price index (CPI) remained steady at 2.9 percent in January, within the BSP’s two to four percent target band. Analysts believe this gives the central bank room to ease policy without fueling price pressures.
Jennifer Kusuma, senior rates strategist at ANZ Research, noted that while food inflation ticked higher in January due to inclement weather, the increase was temporary.
“More importantly, rice prices, which tend to have a more durable impact on overall inflation, have been more well behaved and should moderate further as the government allows for the release of buffer rice stocks,” she said.
Aris Dacanay, economist for ASEAN at HSBC, likewise said “inflation is not so much of a concern with the CPI well within the BSP’s two to four percent target band. Rather, the concern is with growth and the engines that support it.”
He also said that even though the US Federal Reserve kept its monetary stance steady last month, the BSP may not need to follow the Fed.
“History has shown us that there is room for the policy rate differential between the Fed and the BSP to narrow from where it is today, especially since the saving-investment gap is at a more manageable level,” Dacanay said.
While most analysts expect a rate cut this week, they remain divided on how much further easing the BSP will pursue this year.
Chutchotitham projects the next 25 bps of rate cuts delivered in June and August, but she says rate cuts in the second half will be dependent on several outcomes later this year, including the global economic momentum and the Fed’s monetary easing.
“Aside from the general elections in May, we think that BSP could pause in April to reassess overall inflation risks, which may come from the expected rise of water and electricity rates during the year,” she said.
ANZ Research expects a total of 75 bps cuts later this year, while BPI’s Neri cautioned that the BSP’s ability to cut rates further may be constrained by external risks.
“The sizable current account deficit of the economy makes it more vulnerable to external shocks such as global trade tensions,” Neri said. “A narrower interest rate differential could drive portfolio outflows as investors seek higher returns elsewhere.”
“In this context, interest rates could serve as a key buffer against market volatility. We therefore continue to expect a total of 50 bps in RRP rate cuts this year, which will bring the policy rate to 5.25 percent by year-end.”
Still, with economic growth running below the government’s six to eight percent target, the BSP appears poised to prioritize growth in the near term.