BSP seen to cut rates by 100 bps this year

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is seen slashing interest rates by as much as 100 basis points this year as easing inflation could support the growth of the country’s banking sector in the next two years, Fitch Ratings said.

Fitch analysts Tamma Febrian and Willie Tanoto said in an analysis that easing inflation would open up policy space for the BSP to cut rates later this year.

“We project the reverse repurchase rate to decline by about 100 basis points in 2024, backloaded in the second half, and a further 75 basis points in 2025,” they said.

If realized, this would bring the target reverse repurchase rate to 5.50 percent by end-2024 and to 4.75 percent by end-2025.

The BSP’s key policy rate is currently at 6.50 percent, the highest in nearly 17 years, after the Monetary Board tightened borrowing costs by a total of 450 basis points between May 2022 and October 2023.

“The lower interest rate environment and strong economic growth should continue to underpin the banking sector’s growth prospects over the next 12 to 24 months, despite moderate compression in margins,” Fitch said.

The debt watcher expects the country’s gross domestic product (GDP) to pick up to six to 6.5 percent in 2024 and 2025 from the 5.5 percent expansion in 2023.

It said elevated interest rates, which sapped consumer demand last year, are expected to be lower this year.

“The forecast puts the Philippines among the fastest expanding economies in the region, with growth rates significantly outpacing BBB-rated sovereigns’ median of about 2.9 to 3.2 percent,” Fitch said.

Credit growth is also likely to pick up this year amid lower borrowing costs. Faster loan disbursement for infrastructure projects will also spur loan growth, Fitch said.

“We forecast system loan growth to rise by around 10 percent in 2024,” the authors said. If realized, this would be faster than the seven percent recorded in end-2023.

The performance of the Philippine banking sector is also expected to be steady this year.

“Our neutral sector outlook reflects our expectation that the banking system’s financial performance is likely to remain broadly steady over the next 12-18 months,” the analysts added.

However, net interest margins may have peaked for most banks. Margin pressures will also build up in the second half of the year as the BSP starts to cut rates.

“Partially offsetting the decline in margins is a recovery in loan demand and larger trading gains as banks realize higher valuations on debt securities amid declining rates,” Fitch said.

“Cost growth is likely to remain controlled with inflation subsiding. Credit impairment levels are likely to remain broadly steady due to the robust economy,” it added.

The central bank’s Monetary Board extended its policy pause for a fourth straight meeting on April 8, after the BSP raised borrowing costs by 450 basis points from May 2022 to October 2023 to tame inflation and stabilize the peso.