By Luisa Maria Jacinta C. Jocson, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) will likely continue its easing cycle with one other 25-basis-point (bp) rate cut at its meeting on Wednesday, analysts said.
A BusinessWorld poll conducted last week showed that 16 out of 19 analysts expect the Monetary Board to cut back rates by 25 bps at its policy review meeting on Oct. 16.
If realized, this may bring the goal reverse repurchase rate to six% from the present 6.25%.
However, two analysts expect the central bank to chop by 50 bps, while one analyst sees the BSP keeping policy rates unchanged on Wednesday.
The Monetary Board began its easing cycle with a 25-bp cut in August, the first time it reduced borrowing costs in nearly 4 years.
“I’m expecting the Board to chop further (this) week, by a further 25 bps. This is very so within the wake of the extremely soft September print, which undershot expectations, including the BSP’s own forecast range,” Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said in an e-mail.
Mr. Chanco said that the choice to chop can be “fairly ‘easy’ because the BSP has “a lot room to proceed normalizing policy without risking going overboard, in view of how briskly and the way much inflation has fallen in recent months.”
Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp., said that slowing inflation makes a “solid case” for the BSP to chop rates.
Headline inflation sharply eased to 1.9% in September from 3.3% in August. This was also the slowest print in over 4 years or because the 1.6% clip in May 2020.
“Higher still, inflation eased within the heavily weighted food basket on the back of lower tariffs on rice. This offers BSP the peace of mind that inflation is back within the bottle, and can stay on the right track over the approaching months,” Sarah Tan, an economist from Moody’s Analytics, said.
Food inflation slowed to 1.4% in September from 4.2% in August and 10% a yr ago.
Nomura Global Markets Research Chief ASEAN Economist Euben Paracuelles said that easing inflation will “allow the BSP to cut back further the restrictiveness of its monetary stance in a measured way.”
“The lower-than-expected September inflation supports the continuation of monetary easing,” Philippine National Bank economist Alvin Joseph A. Arogo added.
Maybank Investment Banking Group Senior Economist Zamros Bin Dzulkafli said that markets are anticipating inflation to remain inside range in the subsequent few months, resulting from the tariff cut on rice imports and India’s decision to lift the export ban on non-basmati white rice.
“Headline inflation is anticipated to stay inside and even below goal in the approaching months resulting from favorable base effects and the improving outlook for food supply especially for rice,” Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said.
Within the first nine months of the yr, headline inflation averaged 3.4%. This was also the BSP’s full-year forecast.
BSP Governor Eli M. Remolona, Jr. earlier said that inflation is now on a “target-consistent path” which allows it to shift to a less restrictive policy stance.
“With the most recent CPI and likelihood that lackluster demand has contributed to those benign inflation estimates, we consider the BSP has room to chop by one other 25 bps at the subsequent Monetary Board meeting,” Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., said.
“We consider there may be scope for our consumer price index (CPI) given the food price slippage, and waning electricity rate hike effects, to soak up higher imported inflation resulting from recent oil price adjustments,” he added.
GRADUAL EASING
While the central bank will proceed easing rates, analysts said this can likely be done in a gradual manner.
“Nevertheless, the BSP may go for a small cut, mindful of the impact of geopolitical tensions within the Middle East on the inflation outlook, the recent depreciation of the peso against the US dollar, and the repricing of Fed rate cut expectations. Moreover, BSP Governor Remolona alluded to favoring a gradual pace of rate cuts,” China Bank Research said.
The Monetary Board would likely go for 25-bp rate cuts over 50 bps, Mr. Remolona said earlier, because the latter could be more appropriate for a “hard-landing” scenario.
Mr. Neri said that the BSP can also be more likely to “go for a modest 25-bp rate cut reasonably than a more aggressive 50-bp reduction.”
“While inflation has slowed to 1.9% in September, there are several aspects that warrant a more cautious approach,” Mr. Neri added.
Chinabank Research also noted risks to the inflation outlook, citing rising global oil prices.
“Hence, the BSP may choose a small cut in next week’s meeting to mitigate inflationary pressures, especially since higher oil prices may lead to second-order effects,” Chinabank Research said.
“The risks we see listed below are oil supply shocks (in the shape of geopolitical blow-ups) and food-related supply disruptions (like weather) that can interrupt the BSP’s pace of cuts,” Mr. Ella added.
Mr. Asuncion said they revised its inflation forecast to three.2% this yr and a couple of.5% next yr.
“Caveat to this benign inflation outlook is the Middle East event risk featuring the escalation of Israel-Iran hostilities that may sustain oil price volatility and renewed US dollar strength,” he added.
Mr. Neri also cited other risks that may lead to provide disruptions corresponding to the La Niña weather event and a spike in African Swine Fever cases.
The most recent bulletin from the state weather bureau showed that there’s a 71% probability of La Niña forming within the September-November season and can likely persist until the first quarter next yr.
“A gradual reduction within the policy rate would help the economy withstand the impact of those risks in case they materialize,” Mr. Neri added.
“Among the many aspects for this potential decision include Philippine inflation being well inside goal, resilient gross domestic product (GDP) growth, and expectations for the Fed to regularly reduce rates by 25 bps next month,” Security Bank Vice-President and Research Division Head Angelo B. Taningco said.
Ms. Tan said that the 50-bp rate cut by the Fed also gives room for the BSP to further lower policy rates.
The most recent economic growth also paves the way in which for more calibrated rate reductions.
“Recent economic activity prints and emerging growth prospects also suggest that aggressive monetary easing isn’t crucial,” Mr. Neri said.
Philippine GDP expanded by 6.3% within the second quarter, the fastest in five quarters or because the 6.4% within the first quarter of 2023.
“Election-related spending, higher weather and slower inflation in the approaching months are more likely to underpin more solid growth prints, reducing the necessity for large rate cuts,” Mr. Neri added.
PESO
Meanwhile, Chinabank Research also noted that the BSP will think about the recent peso depreciation.
“This month, the peso has depreciated back to the P57 level against the US dollar as markets pulled back expectations of one other jumbo 50-bp cut by the Fed this yr after a robust jobs report and because the conflict within the Middle East stays liable to further escalation,” it said.
The local unit closed at P57.205 per dollar on Friday, strengthening by 15.5 centavos from its P57.36 finish on Thursday. Week on week, nonetheless, the peso sank by 91 centavos from its P56.295 finish on Oct. 4.
“Several Fed officials, including Chair Powell, have voiced their support for a more gradual pace of easing following their initial 50-bp reduction in September,” Chinabank Research said.
“A 25-bp cut by the BSP next week would keep the rate of interest differential between the BSP’s and the Fed’s policy rate at 100 bps, thereby exerting less downward pressure on the peso,” it added.
Meanwhile, Oikonomia Advisory & Research, Inc. said they expect a 50-bp reduction this week because the “significant slowdown in inflation (gives) BSP an extended runway to chop rates.”
Rizal Business Banking Corp. Chief Economist Michael L. Ricafort also sees a 50-bp reduction as a way to match the Fed’s latest rate cut.
“By matching all Fed rate cuts in lockstep, to optimize monetary easing and support economic growth,” he said in an e-mail.
However, Jonathan L. Ravelas, senior adviser at skilled service firm Reyes Tacandong & Co., said that the BSP may keep rates regular and opt to chop by 25 bps afterward in December, citing inflationary risks corresponding to the recent reserve requirement ratio cut, election-related spending, and elevated fuel prices.
Mr. Ravelas said that easing have to be implemented “slowly but surely” and flagged the potential for October inflation breaching the three% level.
