MANILA, Philippines — Global banking giant Citi expects the Bangko Sentral ng Pilipinas (BSP) to cut borrowing costs by a total of 75 basis points this year and another 75 basis points in 2025, which will provide support to the Philippines’ economic growth.
Following the BSP’s policy decision to keep borrowing costs unchanged last week, Nalin Chutchotitham, economist for the Philippines at Citi, said the bank sees 25 basis points of rate cuts in August, October and December this year.
If realized, the key interest rate will go down to 5.75 percent by end-2024. This will be followed by 25-basis-point rate cuts in February, May and August in 2025, which will bring the key rate to five percent by end-2025.
Chutchotitham said monetary easing would likely be needed to support economic growth.
“While growth has been resilient so far, first quarter GDP (gross domestic product) growth at 5.7 percent was below market’s expectation,” she said.
However, there is still a risk of slower rate cuts from the BSP this year, depending on the inflation data, the timing of the US Federal Reserve’s rate cuts and the depreciation pressure on the peso, she said.
Last week, the BSP maintained its policy rates as widely expected, but sounded more dovish by suggesting a higher possibility of rate cuts in August.
This developed, as the BSP’s balance of risks to inflation have shifted toward the downside mainly because of the reduction of rice import tariffs.
The central bank also slashed its risk-adjusted inflation forecast to 3.1 percent for this year from 3.8 percent previously, and 3.1 percent for 2025 from 3.7 percent.
Diwa Guinigundo, Philippine country analyst at New York-based GlobalSource Partners, said it was correct for the BSP to have linked its forward guidance to the improving prospects for inflation down the line.
However, the pass through of peso depreciation to inflation cannot be ignored. Guinigundo said the exchange rate pass through could upset inflation dynamics when the peso depreciates to a large extent over a prolonged period.
Guinigundo also said that June inflation could breach the four percent target of the BSP due to the delay in the implementation of rice tariff cuts and the weekly increases in fuel prices.
“One rate cut is therefore more likely, as the forward guidance has been quite confirmatory so far,” he said. “A second reduction in November or December is, as usual, data-driven both in terms of actual and projected inflation rates in the next two years.”
He said higher production of basic commodities such as grains and meat as well as timely importation in case of supply shortages would be crucial to ensure sustained stabilization of price pressures and inflation.
“Although difficult to pin down, a good computation of the country’s output gap will also help in ensuring that an early or more easing would not dislodge inflation expectation and add inflationary pressure to an otherwise manageable inflation scenario,” he said.
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