BSP may cut rates next week

To spur consumption and investments

MANILA, Philippines — Despite economic growth accelerating in the second quarter, weak private demand may prompt the Bangko Sentral ng Pilipinas (BSP) to cut interest rates next week to help spur consumption and investments. 

Aris Dacanay, economist for ASEAN at HSBC, said the second quarter gross domestic product data supports an August policy rate cut as GDP grew by 0.5 percent quarter-on-quarter, slower than the 1.5 percent quarterly average pre-pandemic. 

“Based on historical trends, growth momentum is indeed waning, supporting our view that full-year growth will remain below trend in 2024 at 5.8 percent,” Dacanay said. 

He said the BSP may cut its policy rates next week despite inflation rising to a nine-month high of 4.4 percent in July. 

“With growth momentum slowing, the BSP will likely begin its easing cycle next week, starting with a 25-basis-point cut to 6.25 percent. We expect the BSP’s policy rate to be six percent by yearend and then five percent by end-2025,” he said. 

The Philippine economy grew by 6.3 percent in the second quarter from 5.8 percent in the first quarter, amid higher government and investment spending. This brought the first half growth to six percent. 

Private consumption, which accounts for over 70 percent of the economy, expanded by a slower 4.6 percent in the second quarter from 5.5 percent a year ago. It marked the slowest since the 4.8 percent contraction in the first quarter of 2021.

“Loosening the monetary reins will help spur consumption and private investment, albeit with a bit of a lag. The tariff rate cut on rice will also likely spur inclusive growth as lower rice prices increase the purchasing power of households,” Dacanay said. 

HSBC expects full-year growth to improve at 6.4 percent in 2025 amid easing monetary policy and lower tariff rates for rice imports.

Jonathan Koh, economist for Asia and the Philippines at Standard Chartered Bank, expects the Philippine economy to grow by six percent this year. He said growth in the second half would be supported by loosening monetary policy. 

“BSP rate cuts should help in terms of the investment front and help private investment to pick up,” he said. “Rate cuts will also help fuel loan growth a bit more on the business front.” 

StanChart expects the BSP to cut borrowing costs by a total of 75 basis points this year, with 25-basis-point cuts in August, October and December.

In a note from BofA Global Research, the bank said that if the government is to keep spending within its P5.76-trillion budget this year, it may only add three percent growth in the second half. 

However, BofA Global Research said the BSP might start its easing cycle only in the fourth quarter, with a 25-basis-point cut in October and again in December, as inflation is expected to slow down to three percent only by end-2024. 

The BSP has been keeping borrowing costs unchanged since it delivered its aggressive 450-basis-point hikes from May 2022 to October 2023, which brought the key interest rate to a 17-year high of 6.5 percent.