By Luisa Maria Jacinta C. Jocson, Reporter

THE US Federal Reserve’s latest signals of policy easing may give the Bangko Sentral ng Pilipinas (BSP) more confidence to continue its own rate cut cycle, analysts said.

Jonathan L. Ravelas, senior adviser at professional service firm Reyes Tacandong & Co. said that the start of the Fed’s easing cycle would “open doors” for the BSP to continue cutting rates.

“If Philippine inflation continues to trend lower, a cut in December is likely,” Mr. Ravelas said in a Viber message.

Federal Reserve Chair Jerome H. Powell on Friday endorsed an imminent start to interest rate cuts, saying further cooling in the job market would be unwelcome and expressing confidence that inflation is within reach of the US central bank’s 2% target, Reuters reported.

“The time has come for policy to adjust,” Mr. Powell said in a highly anticipated speech to the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

Analysts and financial markets anticipate the Fed to deliver its first rate cut at its Sept. 17-18 policy meeting, a view that was cemented after a readout of the central bank’s July meeting said a “vast majority” of policy makers agreed the policy easing likely would begin next month.

Leonardo A. Lanzona, an economics professor at the Ateneo de Manila University, said that Fed rate cuts have already been widely expected as US inflation has stabilized.

“The delay has resulted in a slowdown in the US economy. Thus, the BSP anticipated this eventual decline in rates and proceeded to reduce its policy rates before the Fed in order to avoid any negative effects on the Philippines,” he said in an e-mail.

“Considering these factors, the eventual decrease in Fed rates will no longer have any impact on the Philippine economy.”

The Monetary Board this month reduced the target reverse repurchase rate by 25 basis points (bps) to 6.25% from the over 17-year high of 6.5%.

Mr. Lanzona said that markets likely already took into account the Fed’s projected moves as the BSP had already cut ahead of the US central bank.

“Whatever its consequences it could have made were already incorporated into business decisions, and thus whatever we are experiencing now is going to continue since the lower rates have already been enforced by the BSP,” he said.

“While short-term investments might slightly be affected, the long-term investments are not going to change since the lower rates in both countries have already been rationally incorporated in their forecasts.”

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that local policy rates could fall to as low as 4-5% levels from next year through 2026 as the Fed begins cutting rates.

“Local interest rate benchmarks would go down further by another 50 or 100 basis points or even more from current levels from 2025 to 2026, as the Fed would cut rates by a total of about 225 bps from 2024 to 2026 (that could be matched locally by the BSP) based on the latest Fed dot plot,” he said.

BSP Governor Eli M. Remolona, Jr. has signaled the possibility of another 25-bp cut in the fourth quarter. The Monetary Board has two remaining rate-setting meetings this year, on Oct. 17 and Dec. 19.

Meanwhile, Mr. Lanzona noted that risks to the inflation outlook in the Philippines could pose a risk to the BSP’s policy reductions.

“The inflation here is fundamentally a supply-side phenomenon, and the policy rates are really not supposed to stop inflation but merely to eliminate inflationary expectations,” he said.

“Hence, because the government has not been able to effectively implement a strong productivity plan, especially in agriculture, inflation will remain a threat that can weaken the currency.”

The BSP sees headline inflation averaging 3.4% this year and 3.1% in 2025. Inflation accelerated to a nine-month high of 4.4% in July.

“Furthermore, the continued pump-priming of the government further adds on to the risks of inflation. This means that BSP’s reduction of interest rates is ill-advised,” Mr. Lanzona said.

He added that the BSP must continue monitoring the Fed rate to support the peso. “It should keep its rate very close, if not higher, than the Fed rates.”

Mr. Ricafort likewise said there must be a “healthy” interest rate differential to stabilize the exchange rate. 

The Fed funds rate is currently at the 5.25-5.5% range.

“Further cut in local policy rates are possible if the peso exchange rate is relatively stable or stronger, global crude oil prices still among 2.5-year lows, and if headline inflation remains within the BSP’s inflation target of 2-4% for the coming months,” Mr. Ricafort added.

The peso closed at P56.333 per dollar on Thursday, strengthening by 16.7 centavos from its P56.5 finish on Wednesday. The local currency was previously trading at the P57-58 level in the past few months. — with inputs from Reuters

ECONOMIC GROWTH in the Philippines and the rest of Southeast Asia is seen to continue on an expansionary path until 2025, Moody’s Analytics said.

“Growth will accelerate in Southeast Asia, supported by trade, investment, consumption, generally stimulatory fiscal policy, and, by early next year, easing monetary policy,” Moody’s Analytics Chief Asia-Pacific Economist Steven Cochrane said in a commentary.

“The Philippines and Indonesia will not lag far behind Vietnam, but their economies are not as closely tied to the global economy,” he added.

Moody’s Analytics expects Philippine gross domestic product (GDP) to expand by 5.9% this year, 6% next year, and 6.1% in 2026. This would fall short of the government’s 6-7% growth target for 2024, 6.5-7.5% for 2025, and 6.5-8% for 2026.

The Philippine economy expanded by 6.3% in the second quarter, faster than 5.8% in the first quarter and 4.3% in the same period a year ago. This was also the fastest growth since 6.4% in the first quarter of 2023.

In order to meet the lower end of the government’s 6-7% target band this year, GDP would need to expand by at least 6% in the second semester.

Moody’s Analytics said it is optimistic about the growth in the overall Asia-Pacific (APAC) region. 

“The outlook for the APAC economy in 2025 is good, even though economic growth in China and India will likely slow over the coming year,” Mr. Cochrane said.

“A slow improvement in global trade, robust investment spending, and continued consumer spending will drive economic expansion in the region,” he added.

For the Philippines, Mr. Cochrane said that there must be an “aggressive push” to ramp up infrastructure in order to support growth.

The Marcos administration plans to spend 5-6% of GDP on infrastructure annually.

The latest data from the Budget department showed that infrastructure spending jumped by 20.6% year on year to P611.8 billion in the first half of the year.

The Philippines “must stick to its plans and execute well,” Mr. Cochrane said.

“Fiscal policy in the Philippines is strongly focused on infrastructure development, but actual execution of this policy has been uneven this past year,” he added.

The government has approved 186 flagship infrastructure projects worth P9.6 trillion so far.

Meanwhile, Moody’s expects Philippine headline inflation to settle at 3.5% this year, a tad higher than the Bangko Sentral ng Pilipinas’ (BSP) 3.4% full-year forecast.

Inflation accelerated to 4.4% in July, though the central bank said that inflation is seen to trend downward to settle within the 2-4% target band in the coming months.

For 2025, inflation is seen to settle at 3.2%, also slightly higher than the BSP’s 3.1% forecast.

On the other hand, Mr. Cochrane flagged risks to the growth outlook for the region, such as weaker consumer sentiment in China, geopolitical risks, and the upcoming US elections.

“Should Donald Trump win the presidency, it would lead to higher tariffs on goods imported by the US from China and much of the rest of the world,” he said.

However, he noted that since the Philippines is a less export-sensitive economy, it “faces much less risk in the Trump-election scenario.”

CREDIT RATING
Meanwhile, Moody’s Ratings last week affirmed the Philippines’ investment grade rating of “Baa2” with a “stable” outlook.

“The ratings affirmation reflects a range of factors. The government’s passage of a series of reforms to liberalize the economy to attract foreign investment over the past several years will support the Philippines’ high medium-term growth potential,” it said in a statement on its website.

The credit rater said its affirmation was also due to expectations that “fiscal consolidation will resume with the debt burden to remain higher than pre-pandemic levels but comparable to similarly rated peers over the medium term.”

The government is targeting to bring the debt-to-GDP ratio to 60.6% and deficit-to-GDP ratio to 5.6% by yearend.

However, Moody’s also cited risks such as weakening debt affordability due to elevated interest rates, exposure to climate risks, and geopolitical uncertainties, among others.

BSP Governor Eli M. Remolona, Jr. welcomed Moody’s affirmation of the Philippines’ credit rating. “We are taking a measured approach in safeguarding price stability conducive to sustainable economic growth,” he said.

Finance Secretary Ralph G. Recto said the investment grade rating allows the government to secure more affordable financing. 

“These will create more quality jobs, increase incomes, and reduce poverty incidence in the country,” Mr. Recto said in a statement.

The government is aiming to achieve an “A” rating status by the end of the administration. 

Earlier this month, Japan-based Rating and Investment Information, Inc. upgraded the Philippines’ investment grade rating to “A-.” — Luisa Maria Jacinta C. Jocson