THE BANGKO SENTRAL ng Pilipinas (BSP) will likely cut borrowing costs by 150 basis points (bps) starting the third quarter of this year until the first quarter of 2025, according to Nomura Global Markets Research.
In a report dated Jan. 5, Nomura said the BSP will likely remain cautious of upside risks to inflation despite the slowdown in December and maintain tight policy settings.
“We therefore reiterate our forecast for BSP to start cutting only in August and deliver a total of 150 bps in rate cuts to 5% through the first quarter of 2025,” the report, authored by research analysts Euben Paracuelles, Charnon Boonnuch, and Nabila Amani, said.
The BSP has emerged as the most aggressive central bank in the region after raising key policy rates by 450 bps from May 2022 to October 2023 to quell inflation and anchor inflation expectations.
In 2023 alone, the Philippine central bank hiked policy rates by 100 bps, including a 25-bp off-cycle hike on Oct. 26, 2023. This brought the key rate to 6.5%, the highest since the 7.5% seen in May 2007.
“Despite recent declines, headline inflation, by our forecast, is unlikely to return to within the target before July 2024, supporting BSP’s higher-for-longer signals,” Nomura said.
Headline inflation slowed further to 3.9% in December from 4.1% in November, returning back to within the BSP’s 2-4% target for the first time since March 2022.
However, inflation averaged 6% for 2023, slightly higher than 5.8% in 2022. This marked the second straight year that inflation breached the BSP’s 2-4% target band. The 6% full-year print was the highest in 14 years or since the 8.2% average in 2008, at the height of the global financial crisis.
“While inflation returned to target earlier than BSP’s forecast of third quarter 2024, we do not see an immediate impact on monetary policy, given BSP remains cautious of upside inflation risks and remains hawkish,” Nomura said.
The BSP earlier said the key upside risks to inflation include higher transport fares, increased electricity rates, as well as rising food and oil prices due to strong El Niño conditions.
The central bank has said it will keep policy settings sufficiently tight until a sustained downtrend in inflation becomes more evident.
FISCAL BALANCEAt the same time, fiscal consolidation in the Philippines will likely be slower and gradual than government targets in 2024, Nomura said.
Latest data from the Treasury department showed the National Government’s budget deficit narrowed by 24.8% to P93.3 billion from the P123.9-billion gap in November 2022. However, the November deficit widened from P34.4 billion in October.
“This implies the full-year 2023 deficit could be tracking at 5.9% of GDP (gross domestic product), below our forecast of 6.6% and the government’s target of 6.1% under the medium-term fiscal framework (MTFF),” Nomura said.
It also noted that about 75% of the strong performance in November was mainly driven by higher tax collections and nontax revenues.
This year’s national budget is set at P5.768 trillion, representing 21.1% of GDP. The fiscal deficit ceiling is set at P1.394 trillion or 5.1% of GDP this year.
“Our view remains that fiscal consolidation will likely be slower than MTFF targets to reduce the drag on growth, and fiscal deficits remain high relative to pre-pandemic levels,” it added. — Keisha B. Ta-asan