BSP seen cutting 175 bps this year

FALLING inflation and the need to sustain economic growth could prompt the Bangko Sentral ng Pilipinas (BSP) to cut key interest rates beginning June, Capital Economics said.

“With the economy set to struggle and inflation likely to remain within target, we think the central bank will cut interest rates soon,” the research provider said in a report.

It forecast a total reduction of 175 basis points (bps) for 2024, which it said is “more dovish than other analysts are expecting.”

The BSP’s benchmark rate currently stands at 6.5 percent, the highest since 2007, following a total of 450 basis points of hikes beginning May 2022.

“While the big falls in inflation are now over, the headline rate should remain within the BSP’s target range over the coming months, helped by improvements in food supply and weak economic growth,” Capital Economics said.

Inflation, which surged to a 14year high of 8.7 percent in January last year, finally returned to target in December. It slowed further at the start of 2023 but picked up in February to 3.4 percent.

Capital Economics expects inflation to decline to 3.0 percent this year, within the BSP’s 2.0- to 4.0-percent target.

The rate, however, is expected to pick up next year to 3.5 percent and stay there in 2026.

March inflation data will be released Friday next week.

“The pace and timing of rate cuts are likely to be in part determined on when the US Federal Reserve starts to loosen policy,” Capital Economics said.

“Given our view that the Fed will start cutting interest rates in June, we think the BSP will follow shortly after,” it added.

The Fed’s June meeting will be on the 11th and 12th, while the BSP will hold its own on the 27th.

As for the Philippine economy, Capital Economics noted that while growth rebounded strongly in the second half of last year, this was unlikely to be sustained this year.

Gross domestic product (GDP) growth is expected to hit 5.5 percent this year, slightly lower than 2023’s 5.6 percent and a full percentage point below the government’s 6.5- to 7.5-percent target.

“Fiscal policy is also likely to act as a drag on growth,” Capital Economics said, adding that weak global growth would also weigh on merchandise exports as well as remittances.

It expects GDP growth to rebound next year, accelerating to 6.5 percent, which is at the bottom end of the government’s 6.5- to 8.0-percent medium-term target.