Policy Rate Cut Now More Likely Analysts Favorable Inflation Outlook (Note I assume that Now More Likely refers to the likelihood of a rate cut being announced by the Bangko Sentral ng Pilipinas (BSP) next Thursday.)

Policy Rate Cut Now More Likely Analysts Favor Favorable Inflation Outlook

As another quarter begins, analysts are increasingly confident that a rate cut will be announced by the Bangko Sentral ng Pilipinas (BSP) next Thursday. This prediction is driven by a favorable inflation outlook and subdued economic growth.

According to recent data, consumer price growth remained unchanged in January at 2.9 percent, as lower rice prices offset modest increases in utility and food costs. Core inflation, which excludes volatile food and energy items, also slowed to 2.6 percent from 2.8 percent in December.

Chinabank Research suggests that these developments provide room for further interest rate cuts by the BSP, although increased global uncertainty and persisting upside risks to the inflation outlook would continue to support a cautious approach to policy easing.

The research firm believes that monthly and full-year inflation prints will likely remain within the BSP's 2.0- to 4.0-percent target, barring any unexpected shocks. The BSP itself has announced a measured approach to policy easing, aimed at ensuring price stability conducive to sustainable economic growth and employment.

Senior economist Emilio Neri of the Bank of the Philippine Islands also sees continued policy easing as a possibility. However, he notes that a key consideration is the potential trade-off between monetary easing and currency stability. The peso may come under pressure if the US Federal Reserve leaves interest rates unchanged for longer.

While Neri believes that the scope for cuts this year remains limited, aside from interest differential-driven portfolio outflow, the economy's sizable current account deficit makes it more vulnerable to intensifying external shocks. Cutting the policy rate aggressively could amplify this vulnerability and exert unmanageable pressure on the peso.

Bank of America warns that persistently high inflation in February and March could put an expected April policy rate cut at risk. The bank expects a 25 bp (basis point) rate cut in February and another 25 bp cut in April, while the US Fed stays on hold.

BSP Governor Eli Remolona Jr. has already signaled fewer cuts this year, with the first cut happening in the first half of the year. He believes that 75 basis points of cuts would be too much, given lingering inflation risks.

The central bank's benchmark rate currently stands at 5.75 percent following three 25-basis point reductions beginning August last year.

Conclusion

As we head into another quarter, it is clear that analysts are increasingly convinced that a rate cut will be announced next Thursday. With a favorable inflation outlook and subdued economic growth, the conditions are ripe for further policy easing. However, as always, there are risks to consider, from global uncertainty to currency stability. As policymakers weigh their options, one thing is certain the stakes are high, and the outcome will have far-reaching implications for the economy.

Keywords Policy rate cut, BSP, inflation outlook, economic growth, interest rates, monetary easing, currency stability

Edward Lance Arellano Lorilla

CEO / Co-Founder

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