BSP likely to start cutting rates in Q3, analysts project

WITH consumption hurting the country’s recent economic performance, analysts said the Bangko Sentral ng Pilipinas (BSP) is expected to start cutting rates as early as the third quarter.

In its latest Country Risk & Industry Research, BMI, a unit of Fitch Solutions, projects a rate cut by the Monetary Board in July when the United States Federal Reserve is also expected to cut rates.

Last week, the Philippine Statistics Authority (PSA) reported that the country’s GDP growth averaged 5.7 percent, slower than the 6.4 percent in the first quarter but faster than the 5.5 percent posted in the last quarter of 2023.

(See: https:// .com. ph/2024/05/10/spending-cutbacksto-continue-say-experts/)

“Our forecast incorporates a rate cut by the central bank in July, the same month we expect the Fed to begin easing, which is a more dovish view compared with market positioning,” BMI said in a report.

High interest rates, BMI noted, caused a decline in investments in the first three months of the year. The tight monetary policy made borrowing costs soar.

BMI said, however, that the El Niño is expected to affect food production, pushing commodity prices up and delaying any disinflation.

“The result is largely consistent with our 6.2 percent full-year growth forecast, which we maintain. Labor market conditions have tightened, and we still expect looser monetary policy to lift economic activity over the coming quarters,” it added.

Meanwhile, the Bank of the Philippine Islands (BPI) also expects the US Federal Reserve movements to have significant weight on BSP’S monetary policy.

BPI expects the BSP to start easing monetary policy by the third or fourth quarter. If inf lation stabilizes and the Fed cuts rates, this will convince monetary authorities to reduce key interest rates.

But overall, BPI expects BSP to “embrace a cautious approach to monetary policy” by keeping rates high in the first semester of 2024.

“Easing its monetary policy may also be contingent on the Federal Reserve’s future policy move. If local inflation conditions are right, the BSP will likely respond immediately with rate cuts once the Fed begins its easing cycle,” BPI said.

Any easing of the monetary policy would bode well for the embattled Philippine peso. The peso has been taking a beating since April 18 when the peso traded downward to P57.203 to the US dollar from P56.971 to the greenback on April 17.

BPI said that based on its observations, the Philippine peso tends to strengthen when the Fed eases monetary policy.

“However, while a Fed cut might lead to Peso appreciation, its gains are likely to be smaller compared to other emerging market currencies given the substantial current account deficit of the country,” BPI said.

Moving forward, BPI expects some rebound in investment spending this year, given expectations that businesses will raise capital expenditures once key policy rates come down.

BPI noted that the loan portfolio of banks grew by 8.6 percent in February, faster than the 7 percent growth in previous months.

It added that capital-intensive industries have also seen expansion such as real estate, manufacturing, and utilities. This, BPI said. could reflect an increase in their capital expenditures.

Earlier, National Statistician Claire Dennis S. Mapa said household consumption spending, which posted growth of 4.6 percent, was the slowest in 14 years, sans the pandemic years.

Consumption spending accounted for 74.5 percent of the country’s GDP in the January to March period this year.

Based on PSA data, Household Final Consumption Expenditure (HFCE) for food and non-alcoholic beverages slowed to 0.5 percent from 0.6 percent in the fourth quarter and 9.9 percent in the first quarter of 2023.

The data also showed consumption for education slowed to 3.8 percent in the first quarter of 2024 from 8.3 percent and 11.5 percent in the fourth and first quarters of 2023, respectively.

The PSA also said spending for restaurants and hotels slowed to 11.9 percent in the first quarter of 2024 from 15.6 percent in the fourth quarter and 20.2 percent in the first quarter of 2023.

Spending for vices—alcoholic beverages and tobacco—contracted 2.7 percent in the first quarter of 2024. In the last quarter of 2023, spending for these items posted a growth of 0.6 percent and in the first quarter last year, 7.4 percent.

The data also showed that valuables, under gross capital formation, contracted 25.3 percent, the steepest decline since the first quarter of 2022. Valuables include the purchase of antiques, jewelries, and other high-value items.