Large BSP rate cuts loom – BMI

MANILA, Philippines — Following the country’s first rate cut in August, BMI Country Risk & Industry Research expects the Bangko Sentral ng Pilipinas (BSP) to slash policy rates further by 50 basis points in October and another 25 basis points in December.

If realized, this will bring the benchmark interest rate down to 5.5 percent by end-2024 from the current 6.25 percent. This is a level last seen when the BSP hiked rates by 50 basis points to 5.5 percent in December 2022.

“The BSP kicked off its easing cycle with a 25-basis-point cut in August, and we expect the BSP to ease more aggressively over the coming months,” BMI said in a report.

The BSP cut interest rates by 25 basis points in its August meeting, bringing the key rate to 6.25 percent from 6.50 percent previously. Prior to the cut, the BSP kept its policy rate unchanged for six straight meetings since November 2023.

“The BSP’s decision to lower interest rates ahead of the Fed is a sign that policymakers are starting to grow increasingly concerned about the economy’s health. Indeed, the authorities stated that economic growth could fall below the government’s target in 2025 and 2026,” BMI said.

According to BMI, the decision of the US Federal Reserve to cut rates by 50 basis points in September provides room for the BSP to ease more aggressively this month.

Thus, the BSP can deliver a half point cut on Oct. 16 as the economy is in need of support following the gross domestic product (GDP) data in the second quarter.

“The boost received from a surge in investment activity will prove difficult to sustain against the backdrop of high interest rates. In the face of an economic slowdown, policymakers will likely seek to unwind restrictive policy settings to bolster growth at the earliest possible time,” BMI said.

BMI also said that current economic conditions may support further interest rate cuts in 2025 as inflation has become less of a concern. The BSP is expected to cut rates by 100 basis points to 4.50 percent.

“The cut in rice tariffs will almost certainly see price pressures recede further. Our estimates point to a 1.2 percentage point lowering of the headline figure, feeding into our forecast for inflation to reach 2.8 percent by end-2024,” it said.

BMI said that throughout this easing cycle, the BSP would deliver a total of 200 basis points of cuts from the 6.50 percent peak. Meanwhile, the Fed is expected to slash rates by 250 basis points throughout this easing cycle.

“When all is said and done, a 150-basis-point interest rate differential will be maintained between the two economies,” it said.