THE Bangko Sentral ng Pilipinas (BSP) will likely continue with its easing cycle this year but fewer rate cuts are expected after Fed signals plan to slow rate cuts, BMI, a Fitch Solutions unit, said.
"The BSP is still on track to deliver another 25 bps (basis points) cut at its next meeting. But broadly speaking, we think that the pace of easing will slow against the backdrop of a more hawkish Fed," the BMI said in a commentary on Thursday.
"To be clear, we think that the BSP will frontload interest rate cuts to support the economy. But its hands are tied when it comes to the extent of its loosening cycle," it added.
Last year, the Monetary Board of the BSP reduced policy rates by a total of 75 basis points, bringing the benchmark policy rate to 5.75 percent from 6.50 percent.
The BMI said that for this year, the BSP will likely deliver another 75 basis points rate cut.
"While policy loosening will continue, its implementation will be extended over the time horizon. To be clear, we are still expecting the terminal rate to be around 4.50%. But the BSP will probably not get there in 2025. We are only projecting about 75 bps of cuts this year with 50 bps in H1 (first half) and the remaining 25 bps in H2 (second half)," it said.
According to the BMI, the main constraint is the Fed which signaled fewer cuts this year.
"The Fed has dialed back on its own projections for interest rate cuts following Trump’s return to the White House. Our team believes that monetary settings in the US will remain restrictive and are expecting just 100 bps of cuts in 2025 compared to 150 bps previously," said the BMI.
The BMI projects that same as last year, the BSP will also cut rates ahead of the Fed.
It noted, however, that the BSP's decision to cut ahead of Fed last year has weighed on the peso as the currency weakened to 59-to-a-dollar level following the last cut on Dec. 19.
"Admittedly, the peso has since recovered slightly to PHP58.00/USD but it would have been weaker had the BSP not intervened to curb excess volatility in the market. The bigger picture is that the BSP does not have the space to cut much more than the Fed if it hopes to preserve external stability," said the BMI.
The BMI, meanwhile, said inflation will continue to settle within the government's 2 to 4 percent target this year.
"The Bank has very little to worry about when it comes to inflation. Admittedly, we expect price pressures to pick-up over the coming months. But broadly speaking, it will remain within the BSP’s targeted range of 2.0-4.0% in 2025 barring external shocks," it said. PR
