ANZ expects BSP to cut rates by 50 bps this year

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may start cutting interest rates this year instead of next year, according to the research arm of Australia and New Zealand Banking Group Ltd.

In a commentary, ANZ Research chief economist Sanjay Mathur and economist Debalika Sarkar said the BSP may start its easing cycle by the end of the year, as inflation eased to within the two to four percent target range in December 2023.

“Considering these developments, we now expect the BSP to start its easing cycle in the fourth quarter of 2024 as opposed to our initial expectation of early 2025. Our year-end 2024 and 2025 policy rate forecasts are at six percent and five percent, respectively,” Mathur and Sarkar said.

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

The ongoing tightening cycle of the central bank brought the benchmark interest rate to a 16-year high of 6.50 percent, the highest since the 7.50 percent recorded in May 2007.

This helped inflation ease to a 22-month low of 3.9 percent in December from a 14-year high of 8.7 percent in January last year.

Despite the slowdown last month, inflation accelerated to an average of six percent in 2023 after quickening to 5.8 percent in 2022 from only 3.9 percent in 2021. This is the second straight year that the consumer price index (CPI) breached the central bank target.

“Philippines’ headline inflation fell below four percent year-on-year in December after hovering above the two to four percent target band for 20 months. The faster-than-expected deceleration in prices should be comforting for the BSP,” Mathur and Sarkar said.

However, the economists said the Philippine central bank needs to be patient and cautious for now.

“Inflation expectations are not anchored yet and pressure on the current account is re-emerging. Even so, easing financial conditions in the US should help fund the current account deficit,” they said.

According to ANZ, the Philippines’ headline inflation improved faster than anticipated.

“The improvement in November and December 2023 inflation has come about earlier than even the central bank’s expectations. The BSP expected the headline to retreat into the two to four percent target range in the first quarter of 2024,” they said.

However, ANZ is mindful that December was the first month of inflation being within the two to four percent target range.

“For a policy pivot, the BSP will need consistent evidence of headline inflation remaining within the band and gradually converging toward the midpoint. Secondly, the latest consumer survey shows that inflation expectations are not only de-anchored, but still rising. Thirdly, upside risks to domestic food prices continue to linger as the impact of the ongoing El Niño on global food prices has not fully played out,” the authors said.

With a cautious approach, Mathur and Sarkar said the progress on inflation should allow the BSP to initiate rate cuts earlier than ANZ had anticipated.