By DERCO ROSAL
As another Bangko Sentral ng Pilipinas (BSP) interest rate cut looms, economists and bankers are citing various factors entailing easy monetary policy, including slowing inflation and economic growth.
Bank of the Philippine Islands (BPI) lead economist Emilio S. Neri Jr. also expects monetary authorities to take a "cautious" approach towards policy easing to balance growth prospects with looming risks.
BPI president and chief executive officer (CEO) Jose Teodoro K. Limcaoco told reporters last week "there's a strong possibility" the Monetary Board will again lower key interest rates when the BSP's highest policy-making body decides on policy stance on Wednesday, Oct. 16.
Limcaoco, who also heads the Bankers Association of the Philippines (BAP), noted that most economists think the forthcoming cut will again be 25 basis points (bps) like that in August to bring the policy rate further down to six percent.
‘Aggressive easing not needed’
While Neri projected the country’s inflation to stay within or below target due to favorable base effects and improved food supply, potential supply disruptions and rising diseases are the risks to watch out for.
“A gradual reduction in the policy rate would help the economy withstand the impact of these risks in case they materialize,” Neri said in an Oct. 11 statement.
For him, “aggressive monetary easing isn’t necessary” as recent data shows that the economy is performing well.
Despite a decline in agriculture and slower household consumption, growth in domestic product (GDP) held steady at six percent in the first half of 2024, he noted.
Election spending, improved weather, and expected lower inflation are likely to support economic growth, reducing the need for significant rate cuts, Neri stressed.
“Another factor to consider is the external position of the country, which has yet to return to pre-pandemic shape,” the economist added.
While foreign reserves have hit a record high of $112 billion, external debt is rising faster which causes the foreign reserves-to-external debt ratio to fall from 112 percent to 86 percent.
To strengthen the country’s external position, Neri advised the central bank to take a cautious approach to its interest rate cuts as maintaining a positive interest rate differential can help rebuild foreign reserves and stabilize the foreign exchange market, preventing inflation and protecting currency competitiveness.
External risks further limit the room for policy rate cuts, BPI said. It includes rising trading costs from protectionism, escalating Middle East conflicts affecting oil prices, and a strong US economy, with recent peso fluctuations highlighting market volatility concerns.
Agreeing with this, Dutch banking giant ING stated in its Oct. 11 report that the peso “has been quite weak recently, so this could encourage the BSP to be a little more cautious.”
Given the stable inflation and as long as the peso doesn't weaken significantly before the meeting, a further 25 bps cut is likely, ING said.
Jonathan Ravelas, senior adviser at Reyes Tacandong & Co. and managing director of e-Management for Business and Marketing Services, also urges caution against aggressive cutting.
Ravelas, however, suggests the central bank to keep its policy rate unchanged, asserting that its reduction could lead to inflationary pressures.
According to him, keeping the rate steady manages inflation risks effectively amidst a challenging economic environment.
Back-to-back 25 bps rate cut
A few more economists expressed the strong likelihood of a 25-bp cut.
In an Oct. 11 report, senior economist Alvin Liew and economist Loke Siew Ting of Singapore-based United Overseas Bank (UOB) said downbeat inflation in September is a "strong justification for the BSP to deliver a back-to-back interest rate cut of 25 bps" in its October and December meetings.
Agreeing with UOB, Deutsche Bank Research also expects the central bank will lower interest rates by 25 bps after the inflation report for September showed “sharper-than-expected decline,” falling to an over four-year low of 1.9 percent from 3.3 percent in August.
As India lifts restrictions on rice exports and the reduced rice tariff of 15 percent takes effect, Deutsche Bank Research expects food inflation to slow even more “at least in the near term,” it said in its Oct. 11 report.
Meanwhile, London-based Capital Economics cites slower quarter-on-quarter economic growth as the major reason for next week's second rate cut in a row.
“The economy is in need of further support,” the think tank said in an Oct. 11 report, noting that the local economic output expansion dropped to 0.5 percent quarter-on-quarter during the second quarter from 0.9 percent in the first quarter.
In the future, Capital Economics said reduced government spending and weak demand for exports are likely to keep economic growth low.
Looking ahead, the think tank expects additional rate cuts through the end of this year and into 2025.
“Our forecast that rates will finish next year at 4.75 percent makes us more dovish than the consensus,” it added.