Citi sees shallow rate cuts in 2024, 2025

Global banking giant Citi is now expecting smaller interest rate cuts from the Bangko Sentral ng Pilipinas (BSP) in the next two years due to a more cautious stance on inflation risks.

Nalin Chutchotitham, economist for the Philippines at Citi, said the central bank’s Monetary Board is expected to deliver a shallower 75-basis-point rate cut for this year and next year from an earlier projection of 100 basis points.

“We continue to expect rate cut in August 2024, but now we only see a 75-basis-point cut in both 2024 and 2025 due to BSP’s more cautious stance on inflation risks,” Chutchotitham said.

The global banking giant sees the BSP slashing key interest rates by 25 basis points in August, October and December as the US Federal Reserve is likely to cut interest rates by a total of 100 basis points for this year.

“The BSP would still preserve the 100 – to 125-basis-point differential to partly support the peso. We expect a smaller 75-basispoint rate cut (to five percent ) in 2025, instead of 100 basis points, likely in February, May and August, with real policy rate easing toward 1.5 to two percent,” Chutchotitham said.

The BSP has emerged as the most aggressive central bank in the region after hiking policy rates by 450 basis points between May 2022 and October 2023 to tame inflation and stabilize the peso.

This brought the benchmark interest rate to a 17-year high of 6.50 percent from an all-time low of two percent during the height of the COVID pandemic.

According to Chutchotitham, Citi continues to monitor upside risks from ongoing tightness in food supply and potential largerthan-expected minimum wage hike as inflation picked up slightly to 3.8 percent in April from 3.7 percent in March.

Headline inflation averaged 3.3 percent in the first four months, well within the BSP’s two to four percent target range.

“We expect no further rate hikes by the BSP, without significant new shocks. But the BSP would likely retain its hawkish stance to help anchor inflation expectations,” the economist said.

She said Citi has retained its inflation forecasts at 3.6 percent for 2024 and 3.3 percent for 2025.

The global banking giant, she added, is also expecting inflation to rise from March to July due to base effects as well as the planned adjustments in domestic prices brought about by the higher water rates as well as the increase in excise taxes on alcohol and tobacco.

“We continue to watch for inflation risks from the proposed P100 legislated minimum wage hike. While lawmakers have urged President Marcos to support the bill, the president recently called the regional wage boards for regular and predictable wage hike schedules, which may indicate preference for a more gradual approach,” she said.

The BSP has assumed a P28 wage hike for August 2024 and a P29 increase for September 2025, consistent with historical increases.

“Aside from wages, lagged effects of El Niño on food prices and potential energy price shocks due to geopolitical tensions are also potential risks,” Chutchotitham warned.