Inflation risks could slow BSP easing cycle next year, say analysts

By Luisa Maria Jacinta C. Jocson, Reporter

UPSIDE RISKS to the inflation outlook could slow the Bangko Sentral ng Pilipinas’ (BSP) rate-cutting cycle, analysts said.

“Should these upside risks eventuate, we may not be looking at 100-basis-point (bp) reduction for 2025 but perhaps at a more modest 50- to 75-bp reduction. As the BSP would put it, the final decision will continue to be data-driven,” GlobalSource country analyst Diwa C. Guinigundo said in a report.

Last week, the Monetary Board delivered a third straight rate cut at its final policy review for the year. This brought the benchmark to 5.75% from 6%.

The central bank has slashed rates by a total of 75 bps this year since it began its easing cycle in August.

“We think that cumulative rate cuts in 2025 will amount to 75 bps. We will revise this forecast if adverse geopolitical developments result in higher-than-projected inflation,” ANZ Research said, noting that the central bank hinted a “shallower” rate-cutting cycle next year.

BSP Governor Eli M. Remolona, Jr. said that delivering 100 bps worth of cuts next year may be “too much.”

The central bank will likely keep reducing rates in “baby steps” as an “insurance against a possible increase in inflation,” Mr. Remolona added.

Mr. Guinigundo said it was appropriate for the BSP to gradually shift to a less restrictive monetary stance.

“Given the risks, the BSP must be conserving its ammunition and chose to remain data-dependent,” he said.

He noted that the BSP also continued to flag upside risks to the inflation outlook. “This would partly explain the BSP’s decision to go slow in its easing mode,” Mr. Guinigundo said.

The BSP said the balance of risks to the inflation outlook continues to remain tilted to the upside for 2025 until 2026.

It raised several of its baseline and risk-adjusted forecasts for 2025 and 2026, though these all remain within the 2-4% target band. The central bank raised its baseline inflation forecast to 3.3% for 2025 (from 3.2%) and 3.5% for 2026 (from 3.4%). 

Meanwhile, the risk-adjusted forecasts were also increased to 3.4% for 2025 (from 3.3%). The risk-adjusted projection for 2026 was kept at 3.7%.

A report by Nomura Global Markets Research analysts Euben Paracuelles and Nabila Amani showed it expects the BSP to deliver a total of 75 bps worth of cuts before pausing in mid-2025.

“We maintain our forecast of 25 bps in rate cuts in each of the first three meetings in 2025, before pausing from there.”

“As is clear in BSP’s guidance in its last three decisions, the next decision by BSP will largely be driven by the inflation outlook for 2025 and 2026,” Nomura said.

It also noted that if headline inflation continues to ease, the BSP can “look to further remove the restrictiveness in the monetary stance to support a recovery in the growth outlook, which is facing downside risks.”

Meanwhile, Nomura said it also expects the BSP to deliver more rate cuts than the US Federal Reserve.

“As a result, we still think BSP can cut by more than the Fed, and indeed continue to decouple from its regional peers. In our view, BSP’s more orthodox approach is appropriate and provides much-needed clarity when the global environment is highly uncertain, enhancing BSP’s policy credibility,” it said.

Reuters reported that US central bankers now project they will make just two quarter-percentage-point rate reductions by the end of 2025.

That is half a percentage point less in policy easing next year than officials anticipated as of September, with Fed projections of inflation for the first year of the new Trump administration jumping from 2.1% in their prior projections to 2.5% in the current ones.

Capital Economics Assistant Economist Harry Chambers said the Philippines’ economic growth will also allow the central bank to pace its easing.

“A strong economy gives the BSP a platform to keep rate cuts gradual. GDP growth rebounded in the third quarter of the year, and while tight fiscal policy and weaker global demand will weigh on demand, strong consumption should ensure another year of solid growth in 2025,” he added.

Capital Economics expects 100 bps worth of rate cuts next year, bringing the key rate to 4.75% by end-2025.

OTHER RISKSMeanwhile, Mr. Guinigundo flagged other upside risks that could stoke inflation in the near term.

“The plan to continue bringing down the country’s required reserve ratio may actually result in higher injection of liquidity which, other things being equal, may also turn out to be inflationary,” he said.

“This is one issue that the BSP may have to face in the future given its aggressive stance in reducing it to as low as zero.”

The BSP slashed the reserve requirement ratio for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% from 9.5%, effective last Oct. 25.

Mr. Remolona has said big lenders’ reserve requirements could be brought down to as low as zero before his term ends in 2029.

Meanwhile, Mr. Guinigundo also cited geopolitical tensions and fewer-than-expected rate cuts by the US central bank.

He said the Fed may have to also “go slow in its easing stance because of the potential inflationary effects of the incoming Trump administration’s higher tariff policy, more tax cuts and mass deportation.”

“The hit on the peso cannot be dismissed for its pass through to inflation. The US Fed may be constrained from maximizing its flexibility to reduce its own target rate,” he added.

The peso closed at P58.81 a dollar on Friday, strengthening by 19 centavos from its record-low P59 finish on Thursday. This year so far, the peso has sank to the P59 mark thrice.

“Tension could remain elevated given the sustained hostility in the Middle East and Eastern Europe. They could have collateral impact on external trade and capital flows and ultimately, peso depreciation and domestic inflation,” Mr. Guinigundo added.