Rate cut seen to boost growth

MANILA, Philippines — The much anticipated monetary policy easing will bolster the country’s economic expansion, but the growth will still be below targets amid risks stemming from the impact of El Niño, according to Sun Life Investment Management and Trust Corp. (SLIMTC).

In a market briefing, SLIMTC said the overall outlook for the Philippines this year remains positive largely due to the expected interest rate cut of the Bangko Sentral ng Pilipinas (BSP).

It said that the rate cut may lead to positive market movements, including better corporate earnings, and gross domestic product (GDP) expansion by at least six percent this year. SLIMTC said the growth would be driven largely by consumption and private investments.

SLIMTC chief investment officer Ritchie Teo said the improvement in inflation is a key consideration of the BSP to cut rates starting in the latter part of the second quarter.

“It’s at 25 basis points; we don’t expect more than that given that it will cause volatility. It’s probably good to say that the BSP will only cut when the US Fed cuts,” Teo said.

SLIMTC expects the BSP to slash interest rates by a total of 100 basis points this year.

The Fed, on the other hand, is expected to cut its interest rates by mid-2024 by at least 75 basis points to as much as 100 basis points.

Last week, the BSP kept its key policy rates unchanged at a near 17-year high of 6.5 percent as risks to the inflation outlook remain tilted toward the upside despite improvements over the past months.

SLIMTC is banking on policy easing to boost growth by six percent, better than the 5.6 percent recorded in 2023.

However, this still falls below the 6.5 to 7.5 percent GDP assumption of the Cabinet-level Development Budget Coordination Committee.

Teo said growth would be driven by consumption and potential investment uptick due to the rate cuts.

This will also be complemented by the current downtrend in inflation.

On the flipside, inflation is still considered a key risk to the outlook given that a severe El Nino may impact soft commodity prices. Inflation is expected to hover at 3.8 percent this year.

“Inflation will be controlled but that’s also the main risk here because with high inflation, the rate cuts might not come as expected,” Teo said.

“This is also why the BSP is on hold despite inflation coming down already. They don’t want to see another uptick that they saw last year. Inflation may pick up because there’s still El Nino, but I don’t think that’s something that will make them hike rates,” he said.

Further, SLIMTC is also looking at delayed infrastructure push and the government underspending that could weigh on GDP growth.