Moody’s: BSP rate cut could start in Aug

The Bangko Sentral ng Pilipinas (BSP) could cut borrowing costs by 25 basis points as early as August, and another 25 bps in the fourth quarter, if inflation and the peso stabilize in the second half of the year, Moody’s Analytics said.

Sarah Tan, an economist from Moody’s Analytics, said while inflation is expected to breach the BSP’s two to four percent target in the coming months due to the negative impact of El Niño on food supply, it is expected to decelerate in the third quarter.

The peso should also appreciate against the dollar in the coming quarter after it weakened over the past few weeks, she said.

“Should these developments materialize, it will give the BSP confidence to trim rates as early as in August – the only Monetary Board meeting in the third quarter,” Tan said.

“However, there is a chance that monetary easing could be delayed till October should inflation accelerate above the target range for longer than expected or if the Philippine peso weakens further,” she said.

The Monetary Board kept its policy rate at a 17-year high of 6.50 percent for the fourth straight meeting in April. It is widely expected to keep borrowing costs steady on Thursday, after it hiked rates by a total of 450 bps from May 2022 to October 2023.

According to Tan, there has been good progress on inflation, with the headline print settling within the BSP’s two to four percent target for five straight monthsn.

Headline inflation rose for a third straight month to 3.8 percent in April from 3.7 percent in March. Year to date, inflation averaged 3.4 percent.

“We expect rate cuts to total 50 basis points this year, trimming 25 basis points over two Monetary Board meetings. The first could come as early as August and the second in the fourth quarter, or both cuts could come in the fourth quarter,” Tan said.

The Philippine economy is also expected to grow by 5.9 percent in 2024, missing the government’s six to seven percent target for the year. However, the country will still outperform many of its regional peers this year.

“The easing in policy rate will reduce the pressure on household budgets and see consumer spending rebound alongside a tight labor market and healthy inflow of remittances,” Tan said.

The economy’s gross domestic product (GDP) grew by 5.7 percent in the first quarter, faster than 5.5 percent in the previous quarter but slower than 6.4 percent a year ago.

In a report yesterday, Moody’s Analytics said that after posting gains in January and February, the Philippine economy lost momentum in March when inflation picked up.

It also noted that private consumption was the largest contributor to GDP, as remittances from abroad softened the impact of high borrowing costs.

Meanwhile, ING Bank Manila senior economist Nicholas Antonio Mapa said if rice prices stay unchanged at around P55 a kilo, oil prices sustain their decreases and domestic demand stays soft, inflation could drop sharply in August.

“Although it may be too early to expect the BSP to cut rates in the near term (we still hold our call of the BSP to cut as soon as the Fed), we believe inflation can continue to surprise on the downside before falling sharply by the third quarter,” he said.

“By then, we expect BSP to have scope to start easing monetary policy all the more given the signs of a slowing economy after first-quarter GDP showed a disappointing print of 5.7 percent year on year,” he added.