Central bank likely to continue easing despite inflation uptick, say analysts

THE BANGKO SENTRAL ng Pilipinas (BSP) will likely continue its rate-cutting cycle despite the slight uptick in November inflation, analysts said.

However, risks such as the weakening of the peso could prompt the central bank to be more cautious about further easing.

“Overall, the inflationary pressures were not broad-based, and the near-term outlook remains benign. Therefore, we think the BSP will lower its policy rate by 25 basis points (bps) at its next meeting in December,” ANZ Research said.

Headline inflation quickened to 2.5% year on year in November from 2.3% in October, mainly driven by higher food prices due to typhoon damage.

This brought average inflation to 3.2% in the 11-month period, well within the 2-4% target band.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said that it is “all clear” for a third straight rate cut later this month.

“Crucially, the result was also well within the BSP’s forecast range, 2.2% to 3%, which means the bank will almost certainly make another 25-bp cut to the target reverse repo rate later this month, to 5.75%,” he said.

The Monetary Board is set to have its final policy-setting meeting for the year on Dec. 19.

The central bank could opt to pause its easing cycle or deliver another 25-bp rate cut later this month, BSP Governor Eli M. Remolona, Jr. earlier said.

He said inflationary pressures may prompt them to keep rates steady, while a cut is likely if economic growth remains weak.

Since August, the Monetary Board has delivered a total of 50 bps worth of rate cuts, bringing the key rate to 6%.

“The soft inflation print supports our view of a rate cut in the Dec. 19 meeting, on top of the third-quarter 2024 growth which surprised to the downside,” HSBC economist for ASEAN Aris D. Dacanay said.

Mr. Chanco noted the “disappointing” third-quarter gross domestic product (GDP) print, which would make room for more rate reductions.

The Philippine economy grew by a weaker-than-expected 5.2% in the July-to-September period, slower than the 6.4% growth in the second quarter and 6% a year ago.

This was also the weakest growth since the 4.3% expansion in the second quarter of 2023.

“The Board’s rate-cutting cycle is far from over though, despite the apparent global recalibration of policy rate expectations upwards since the US election,” Mr. Chanco said.

“The BSP, in its response to the latest inflation data, affirmed that it will ‘continue to maintain a measured approach in its easing cycle,’ echoing the same language used in October, when it last reduced rates, by 25 bps.”

Inflation is also seen to remain within the 2-4% target band moving forward.

“On balance, inflation should soon stabilize comfortably below the 3% midpoint of the BSP’s target range — barring any shocks — clearing the way for the 100 bps in further easing we expect next year,” Mr. Chanco said.

The BSP expects inflation to settle within the target band from this year until 2026. It projects inflation to average 3.1% this year, 3.2% in 2025 and 3.4% in 2026.

However, the central bank also warned that the balance of risks to the inflation outlook for next year until 2026 has shifted to the upside.

The BSP’s risk-adjusted forecasts see inflation at 3.3% next year and 3.7% in 2026.

“At the same time, the risks to our end-2025 benchmark rate baseline of 4.75% are skewed markedly to the downside, as policy will remain excessively tight in real terms, even after 125 bp in additional cuts,” Mr. Chanco said.

For 2025, ANZ Research expects a total 75 bps worth of cuts to “help bolster domestic demand.”

Mr. Remolona has signaled the possibility of up to 100 bps worth of rate cuts next year.

PESO WEAKNESSMeanwhile, Mr. Dacanay said that the recent peso depreciation could pose a risk to the BSP’s easing cycle.

“The only upside risk to monetary policy is the currency. The USD-PHP (US dollar-Philippine peso) ranged between P58.5 and P59 over the course of November. It was even millimeters away from breaching its historic highs on Nov. 26.”

The peso fell to the all-time low of P59 against the dollar twice during the month — on Nov. 21 and Nov. 26.

“But things got better since then. The PHP has now appreciated to P58.23 against the USD and, according to HSBC FX, further support should come in due to the seasonality of remittances,” he added.

The peso has since strengthened after sinking to the record low last month. The local unit appreciated to P57.735 per dollar on Friday, up by 14.5 centavos from its P57.88 finish on Thursday.

Mr. Dacanay also said the tone of the US Federal Reserve “will be crucial.”

“However, it will be key to monitor the tone of the Fed in the next two weeks. Any shift to a more hawkish rhetoric may introduce volatility in the currency and prompt the BSP to pause its easing cycle,” he added.

Reuters reported US rate futures were pricing in roughly a 90% chance the Fed will lower interest rates by 25 basis points at its Dec. 17-18 policy meeting, according to LSEG calculations which previously saw just a 72% chance.

The Fed has lowered rates by 75 bps since September, when it launched its easing cycle. — Luisa Maria Jacinta C. Jocson