S&P sees next rate cut in 2024

MANILA, Philippines — A reversal in the Philippines’ monetary policy stance may happen next year as the Bangko Sentral ng Pilipinas (BSP) is likely to cut key interest rates after emerging as the most aggressive central bank in the region, according to S&P Global Ratings.

In its latest global banks country-by-country outlook 2024 titled “Forewarned is Forearmed,” S&P primary credit analyst Nikita Anand said the Philippine central bank may cut its key policy rates by 75 basis points next year.

“We forecast policy rates could decrease by a total of 75 basis points in 2024 as inflation moderates,” Anand said.

The central bank’s Monetary Board has raised key policy rates by a total of 450 basis points, including the 25-basis-point off-cycle hike on Oct. 26 to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations.

Last Nov. 16, authorities decided to leave interest rates untouched as latest projections indicated that inflation outlook had moderated, and to allow previous adjustments to continue to work their way through the economy.

Inflation averaged 6.4 percent from January to October, still above the BSP’s two to

four percent target range. The consumer price index eased significantly to 4.9 percent in October after quickening to 5.3 percent in August and 6.1 percent in September from a year-low 4.7 percent in July.

Likewise, the Philippines also booked a stronger-than-expected economic growth of 5.9 percent in the third quarter.

The economy grew by 5.5 percent from January to September, below the six to seven percent target penned by economic managers via the Cabinet-level

S&P expects the Philippine economy to growth by a slower 5.2 percent this year from a growth of 7.6 percent last year. It expects the economy, however, to rebound with more than six percent expansion in 2024 and 2025.

According to Anand, elevated inflation and interest rates could erode household savings, putting a strain on low-income households and small to midsize enterprises.

Anand said S&P sees credit growth improving next year on the back of higher economic growth, along with lower inflation and interest rates.

“We forecast credit growth of 10 to 12 percent in 2024, higher than the estimated seven to nine percent in 2023,” Anand said.

Credit growth is estimated to slump to single-digit level this year from 11.7 percent in 2022 due to the aggressive rate increases delivered by the BSP.

According to Anand, the sector’s good capital position of 15.2 percent common equity tier-1 ratio and provisioning would cushion against any moderate rise in credit stress.

She added that credit losses would stay flattish at 0.6 to 0.7 percent of gross loans next year.

“We forecast a manageable deterioration in non-performing loan ratio. Large corporates, which form the bulk of the sector’s loan portfolio, should be able to absorb the higher input and financing costs,” Anand said.

The debt watcher said Philippine banks have relatively lower share of riskier unsecured consumer loans and small business loans than peers.

She added that Philippines’ low household leverage of 10 percent of GDP also mitigates risk.

Anand said the earnings of Philippine banks would peak this year, the sector’s return on average assets could normalize to long-term average of 1.2 to 1.4 percent over the next two years after peaking at about 1.5 percent in 2023.

“This is because net interest margins will decline in line with policy rate normalization. A moderating cost-to-income ratio and increasing share of retail loans could provide an upside to profitability over the next three years,” she said.