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Manila Bulletin devider Business devider Banking & Finance devider Rate cuts likely, but BSP still wary of inflationary pressures

Rate cuts likely, but BSP still wary of inflationary pressures

Published Dec 5, 2024 05:03 am

The Bangko Sentral ng Pilipinas (BSP) maintains a measured approach to its monetary policy stance with risk-adjusted inflation forecasts showing a downward trend, while the balance of risks is tilted to the upside in the next two years.

The BSP on Thursday, Dec. 5, hinted that it will continue to cut policy rates, including on Dec. 19 during its last Monetary Board policy meeting for the year. This measured approach comes as inflation trends downwards and remains within the two percent to four percent target range.

On Thursday, the government announced a higher November inflation of 2.5 percent, up from 2.3 percent in October. The November inflation was within the BSP’s projection of 2.2 percent to three percent.

Meanwhile, the BSP still believes inflation expectations remain well-anchored with robust domestic demand and solid economic growth. However, officials are mindful of lingering upside risks to inflation.

“The latest inflation outturn is consistent with the BSP's assessment that inflation will continue to trend closer to the low end of the target range in the near term. This reflects easing supply pressures for key food items, particularly rice,” the BSP said.

Upside risks to the 2025 and 2026 inflation outlook seem manageable for the BSP. These risks stem from potential adjustments in electricity rates and higher minimum wages in areas outside Metro Manila. The downside risks come from the impact of lower import tariffs on rice.

The BSP’s policy-making arm, the Monetary Board, will meet on Dec. 19 to decide on its policy rate. The target reverse repurchase (RRP) rate or the policy rate is currently at six percent.

To balance growth and employment with its monetary policy stance, the central bank has adopted a measured approach in its easing cycle.

Economists surveyed by the BSP have kept their inflation expectations steady at 3.4 percent for this year, with an unchanged outlook that risks to price pressures are “broadly balanced” in the next two to three years.

During its last policy meeting on Oct. 16, the BSP took note of the most recent Survey of External Forecasters for October. This survey showed that the mean inflation forecasts for 2024 and 2026 remained steady at 3.4 percent and 3.2 percent, respectively, compared to the September survey. However, the mean inflation forecast for 2025 was adjusted lower to three percent from 3.1 percent in the previous tally.

The surveyed analysts consider the inflation risks to be broadly balanced, with headline inflation expected to remain low and within-target over the policy horizon.

On Oct. 16, the BSP reduced the policy rate by another 25 basis points (bps), following an Aug. 15 rate cut of 25 bps.

The BSP’s latest risk-adjusted inflation forecast for 2024 is 3.1 percent. The forecast for 2025 is 3.3 percent and 3.7 percent for 2026.

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