• The Monetary Board of Bangko Sentral ng Pilipinas (BSP) cut its Target Reverse Repurchase (RRP) rate by 25 bps to 5.75%, at its final Monetary Board meeting of the year, marking the third policy rate reduction. The move aligns with expectations
  • The interest rates on overnight deposit and lending facilities were also reduced to 5.25% and 6.25%, respectively.
  • BSP statement: Reiterated its statement from the previous meeting that "On balance, the within-target inflation outlook and well-anchored inflation expectations continue to support the BSP's shift toward less restrictive monetary policy." This reflects confidence that inflation will stay within the 2.0% - 4.0% target range, despite the gradual increase since September low. BSP continues its cautious approach, balancing growth stimulation with the risk of rising inflation.
• Upside bias on price pressure and downside risk on growth call for a cautious policy easing
  • Inflation: BSP expects price pressures to stay manageable, within the official target of 2.0% - 4.0%. However, its 2025 risk-adjusted inflation forecast has increased slightly to 3.4% from 3.3%. Meanwhile, no change to its 2026 risk-adjusted forecast at 3.7%. BSP flags that the balance of risks is leaning to the upside due to upward adjustments in transport fares and electricity rates.
  • GDP: BSP expects private domestic spending to be supported by easing inflation and improving labour market conditions. However, it stated, "downside risks in the external environment could materialise and temper economic activity and market sentiment." This highlights the central bank's concern over growth prospects amid geopolitical tensions and global economic uncertainties, which could weigh on domestic growth. Notably, 3Q24 GDP growth slowed to 5.2% (2Q24: 6.4%), lagging behind Vietnam (7.4%), Singapore (5.4%) and Malaysia (5.3%).
  • Currency: The peso depreciated by 6.5% to 59.0 as of December 18 compared to the end of last year, a larger decline than the rupiah (-4.7%) and in contrasts to the appreciation of the ringgit (+2.7%) and baht (+1.8%).
• BSP has ample room to cut policy rates to bolster domestic growth
  • The current interest rate remained higher than the pre-pandemic of 4.0%, and exceeds the long-term neutral rate of 3.8%, reflecting a restrictive monetary policy stance aimed at combating inflation. Although inflation has trended down and is within the official target range, upside risks to price pressures persist. Nevertheless, rising global economic uncertainty, geopolitical tensions, and policy uncertainty under the new US administration may dampen the growth outlook, necessitating further policy support. Therefore, we expect BSP to continue its tendency towards reducing rates in 1H25 to support economic growth amid stable inflation trends.
  • USDPHP year-end forecast (56.0; 2023: 55.4): The peso appreciated toward 57.0 against USD in early December, but reversed course, depreciating as of December 18 due to heightened geopolitical tensions and concerns about China's economy. Achieving the year-end target require strong momentum, which remains challenging. Bangko Sentral ng Pilipinas Rate Decision Policy rate cut by 25 bps to boost growth; fewer reductions expected in 2025

Source: Kenanga Research - 20 Dec 2024