BSP likely to hold policy ra BSP likely to hold policy rate?

The Bangko Sentral ng Pilipinas does not intend to increase its key policy rate, according to BSP Governor Eli Remolona, but the Monetary Board will still discuss what action it would take during its last policy rate meeting on the 19th of this month even as the BSP chief does not see any need to pump prime the economy for next year as some analysts are suggesting.

During a yearend dinner with former banking reporters, Gov. Remolona was quite firm that “I think there is very little chance we would raise (policy rates).” In fact, the BSP chief appears to favor holding rates, stating “It’s possible it is maintained. It’s either maintained or it’s a cut, but it will not be more than 25 basis points.”

He acknowledged fears that a rate cut could stoke inflation, “it’s possible, it’s a risk, but we have to weigh all possible indicators.”

Several key factors were reported yesterday, Thursday, Dec. 12, that would likely be taken into consideration by the Monetary Board when it deliberates next week. These include the rise in US consumer prices in seven months and the decision of the OPEC (Organization of the Petroleum Exporting Countries) to cut oil demand growth forecasts for this year and next for a fifth straight month, the deepest reduction to the 2024 outlook so far after agreeing to extend its supply curbs.

The OPEC had already reduced its projections for consumption growth this year by 210,000 barrels a day to 1.6 million barrels a day, according to its monthly report. It has slashed its projections by 27 percent since July as it belatedly recognized the deteriorating market picture.

The previous week, the OPEC+ alliance led by Saudi Arabia and Russia had agreed for a third time to delay plans to restart halted crude production while also slowing the pace of increases once they do begin next year.

The first in a scheduled series of hikes was postponed to April from January.

It was also reported yesterday that the Bank of Canada has signaled that its rate cuts will be more gradual, with the Canadian dollar strengthening following the rate cut. However, the BOC governor admitted that US president-elect Donald Trump’s tariff threats still adds to economic uncertainty.

In a recent briefing, Abacus Securities vice president for research Nicky Franco sees the BSP easing to continue due to a couple of factors that include  the waning impact of  inflation over the peso-dollar movement over time. Additionally,  he noted that  the BSP has shown tolerance for further peso weakness.

Franco believes that the bigger concern for the Marcos economic team is slowing growth, with the gross domestic product or GDP still below pre-COVID trend.

Franco is even optimistic that  headline inflation will be less that one percent by  February or March next year, which would give the monetary authority the flexibility to cut  policy rates thru 2025.

Based on his projection, Franco puts forth a base case of 4.5 to five percent RRP by the third quarter next year; 75 to 125 bps above the US Fed funds rate.

Glass half full

Abacus Securities’ research group, contrary to other analysts’ more negative outlook following the outcome of the US elections, views the glass as half full compared to the half empty stance.

“The title of our presentation is glass half full. I just felt that it was a very apt title for this time because there’s been so much negativity in the market the past month or so, especially after the US elections, and so there’s the competing half empty view of a glass that’s half filled with water.”

The half empty views, he said,  sees  Trump 2.0 as a “very, very big negative for the Philippines...particularly the tariffs that they want to or Trump wants to impose on China, the EU, Mexico, other countries. This has led to fears being played up for the BPO industry. There’s also fears that the mass deportation promise of Trump is going to hurt remittances for the Philippines.”

Additionally, the negative outlook sees higher tariffs for China, which would be a negative for the region.

However, Franco noted that in the past month after the US election,  the dollar strengthened. A negative view from other analysts, he said, sees the BSP delaying or shortening its easing cycle.

The Abacus analyst, on the other hand, has a more optimistic view for the Philippines

“If we focus on China first, it has been eight years since the first Trump presidency and I believe that China is better prepared this time around compared to the first time.

China should also be less vulnerable, actually, because the exodus of manufacturing capacity from China started during Trump 1.0. Global manufacturers realized at the time or started to realize at the time, that they could not have just one single base of manufacturing globally. So, they started to diversify themselves going to India, for example, or Vietnam, and that this diversification away from China absolutely accelerated during COVID-19,” Franco pointed out.

China shut down during COVID, hurting  supply chains globally because many companies had concentrated their manufacturing base in China, Franco said. Thus, in his view, “China is less important this time around to the global economy compared to Trump 1.0. And more than that, I think that this diversification out of China will eventually benefit the region because it will get some of the manufacturing capacity from China. And hopefully the Philippines also gets it – as long as we have the power.”

On BPOs, Franco argues that the slowdown in the sector from 2010 to 2016 that coincided with the first presidency of Trump was also due to other factors that included the slowdown in approvals for buildings, and the BPO companies also slowing down their expansion due to the effect of the then TRAIN Law.

The TRAIN Law was intended to simplify the tax system, make it fairer, and improve revenue generation for essential government projects and services.

Franco  believes that “a lot of people don’t give as much credit as they should to the BPO industry for growing consistently over the years and now taking over or overtaking the OFW remittance. This is the biggest source of dollar revenues for the country. And despite AI, despite Trump, our view is that the BPO industry will continue to grow over the next few years.”