BSP seen to start rate cuts in August

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) could start slashing interest rates in August this year until the first quarter of 2025 after keeping key rates elevated for a longer period of time, Nomura Global Markets Research said.

In a commentary titled, “Philippines: Continuing to signal patience with a policy pivot,” Nomura said inflation is unlikely to stay within the BSP’s two to four percent target range before July, which will likely prompt monetary authorities to maintain higher-for-longer interest rates.

“This remains consistent with our view that BSP will exercise patience in its pivot. We, therefore, reiterate our forecast for BSP to start cutting only in August, and deliver a total of 150 bp in rate cuts to five percent through Q1 2025,” Nomura said.

The BSP emerged as the most aggressive central bank in the region after hiking key policy rates by 450 basis points since May 2022 to tame inflation and stabilize the peso.

In 2023 alone, the central bank raised interest rates by 100 basis points, bringing the benchmark rate to a 16-year high of 6.5 percent from an all-time low of two percent during the height of the COVID-19 pandemic.

Headline inflation breached the BSP target for the second straight year as it accelerated to six percent in 2023 from 5.8 percent in 2022 due to soaring oil and food prices.

The tightening cycle helped tame inflation to a 22-month low of 3.9 percent in December, the first time in 20 months that it eased within the two to four percent target range from a 14-year high of 8.7 percent in January 2023.

Despite keeping interest rates steady in November and December, Nomura said the BSP’s tone remained relatively hawkish, repeating its assessment that the balance of inflation risks “still leans significantly toward the upside” and indicating the need for the monetary stance to remain “sufficiently tight to allow inflation expectations to settle more firmly.”

“While inflation returned to target earlier than BSP’s forecast of Q3 2024, we do not see an immediate impact on monetary policy, given BSP remains cautious of upside inflation risks and remains hawkish,” it said.

Reiterating its last policy statement, Nomura added that the BSP highlighted in the consumer price index (CPI) release the need to keep policy settings sufficiently tight despite saying inflation would likely moderate in the near term.

The BSP has maintained a tight monetary policy through higher interest rates to constrict spending that has been accelerating quickly, or to curb inflation as it has been rising too fast.