A combination of easing inflation pressures and slowing economic growth will allow the Bangko Sentral ng Pilipinas (BSP) to cut interest rates beginning the third quarter, think tank Capital Economics said.
Across emerging Asian economies, "central banks have recently started to sound more dovish, and we expect most to begin easing policy this year, starting with the Philippines in August," Capital Economics said in its Q3 2024 Emerging Asia Economic Outlook report on June 20.
Capital Economics expects headline inflation to "fall back sharply" in the Philippines to end 2024 at an average of 3.5 percent from last year's six percent, which was the highest annual rate of year-on-year consumer price hikes since 2008. The headline inflation rate stood at 3.5 percent as of end-May.
"The headline rate should remain within the BSP's 2-4 percent target range over the coming months, helped by improvements in food supply and weak economic growth," Capital Economics said.
Inflation is projected to stay within the government's target band of manageable price increases in 2025 (three percent) and 2026 (3.5 percent), based on the think tank's forecasts.
As such, the BSP is seen lowering the policy rate, currently at 6.5 percent, by an initial 25 basis points (bps) in the third quarter to end the year at 5.75 percent. Capital Economics expects more rate cuts next year to bring the overnight rate to 4.75 percent by end-2025.
As multi-year high interest rates weigh on consumption, the Philippines' near-term economic growth would slow down alongside other domestic and global developments, the think tank said.
"Fiscal policy is also likely to act as drag on growth... Weak global growth will also weigh on goods exports as well as remittances," it noted.
The government aims to slash the budget deficit, which had ballooned no thanks to huge borrowings for pandemic response, from 6.2 percent of gross domestic product (GDP) last year to 5.6 percent in 2024 by growing tax and non-tax revenue collections faster than expenditures on public goods and services.
The Philippines' GDP or total goods and services output is forecasted by Capital Economics to grow by 5.5 percent this year, similar to last year's pace and still below the government's two percent to seven percent goal.
"With growth set to slow and inflation likely to remain within target, interest rate cuts are likely to come onto the agenda soon. The pace and timing of rate cuts are likely to be in part determined on when the US Federal Reserve starts to loosen policy," Capital Economics said.
While tensions between Manila and Beijing rise in the West Philippine Sea, it helps that Philippine exports to China accounted for only over two percent of GDP, among the lowest in the region, according to the think tank.
"The worsening relationship between the Philippines and China poses a downside risk to the outlook. However, the fact that the Philippines is not closely integrated into China's economy means the fallout should be limited," it said.
As for the Philippines' other economic indicators, Capital Economics forecasted the current account deficit to narrow to two percent of GDP this year to help strengthen the peso to 56 against the US dollar by yearend. The stock market, meanwhile, is seen hitting 7,100 by end-2024.
Separately, HSBC Global Private Banking (GPB) said in a June 20 statement that it was bullish on Philippine economic growth prospects for the rest of the year while the BSP awaits the US Fed's move on interest rates.
"The Philippines' economy remains healthy for the second half of 2024. The strength and resilience of the Philippine economy will come from its consumers but also supported by investments in infrastructure and reforms.
Notwithstanding the recent moderation in consumer spending, the Philippines has one of the most favorable demographics in the region and is expected to enjoy the structural tailwinds of its demographic dividends in the years ahead.
Therefore, domestic consumer spending will still be a key pillar of its economy due to a healthy labor market and strong wage growth," said James Cheo, chief investment officer of HSBC's global private banking and wealth in Southeast Asia and India.
"Compared to other ASEAN markets, the Philippine equity market has done reasonably well from a year-to-date perspective, compared to the other ASEAN markets. Earnings growth is still robust, and valuation is undemanding. The strength was driven by earnings surprising to the upside could continue to support the market. We are neutral on the Philippines' equity market, as we think a consolidating market is likely in the near term," Cheo added.
As for rate cuts, Cheo said, "HSBC GPB continues to expect the BSP to be very cautious and to ease policy only after the US Federal Reserve."
"We expect the US Federal Reserve to begin its easing cycle in September, starting with a 25bp rate cut. It is only after the Fed cuts that BSP is likely to embark on its first 25bp policy rate cut," Cheo said.