December BSP cut almost certain after Q3 GDP miss
THE BANGKO SENTRAL ng Pilipinas (BSP) is almost sure to deliver a fifth straight cut next month as the third-quarter gross domestic product (GDP) data showed the need for economic stimulus.
“The soft inflation backdrop and weak third-quarter GDP print strengthens the case for reducing borrowing costs further to support domestic demand,” Moody’s Analytics Assistant Director and Economist Sarah Tan said in an e-mail. “We expect a 25-basis-point (bp) cut in December.”
Ms. Tan said the weak growth seen last quarter was worrying as the slowdown came from sectors that typically drive expansion, like household consumption.
“Consumers remained cautious despite easing inflation and lower borrowing costs, suggesting that wage gains have not kept pace with price pressures in recent years, and that recent weather disruptions have encouraged households to build precautionary savings,” she said.
“The third-quarter GDP disappointment suggests BSP will need to move in December, regardless of any potential Federal Reserve moves,” Nicholas Antonio T. Mapa, chief economist at Metropolitan Bank & Trust Co., said in a Viber message “The below consensus print indicates that growth has been in need of support for some time.”
He said the BSP will likely lower benchmark borrowing costs by just 25 bps next month “given its preference for baby steps.”
Philippine GDP grew at an over four-year low of 4% in the third quarter, the government reported last week. This was sharply slower than the 5.5% expansion in the second quarter and the 5.2% clip in the same quarter in 2024.
This was also significantly lower than the 5.3% median estimate in a BusinessWorld poll of 18 analysts and economists.
Officials attributed the weakness to increased cautiousness in government spending amid a corruption scandal involving state infrastructure projects, which they said also affected consumer and investor confidence.
The third-quarter clip brought the nine-month average to 5%, putting the government’s 5.5%-6.5% full-year GDP growth target further out of reach.
Last month, the BSP reduced benchmark rates by 25 bps for a fourth straight meeting to bring the policy rate to 4.75%, bringing total cuts since August 2024 to 175 bps.
BSP Governor Eli M. Remolona, Jr. has said that another cut is possible at the Monetary Board’s Dec. 11 meeting, with further reductions until next year also on the table as they want to support domestic demand amid softening growth prospects.
Security Bank Corp. Chief Economist Angelo B. Taningco said they expect the BSP to deliver a 25-bp cut next month and another 25-bp reduction early next year.
“These additional albeit modest rate cuts are warranted to underpin GDP growth, which was tepid last quarter; temper inflation expectations; and manage foreign exchange volatility,” he said in an e-mail.
JUMBO OR OFF-CYCLE CUT?
BDO Securities Corp., a BDO Capital & Investment Corp. subsidiary, said in a note on Monday that the weak GDP print could fuel more cuts, possibly even “jumbo” reductions.
“Despite the narrowing gap between Fed and BSP policy rates, expectations of slower economic growth have fueled speculation that the BSP may adopt a more dovish stance. Some analysts are even suggesting a 50-bp cut at the December meeting,” it said.
“While such moves could weaken the peso, the BSP appears willing to tolerate depreciation toward P60, prioritizing economic recovery over currency strength or stability.”
Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco and Asia Economist Meekita Gupta said in a report on Monday that the “ugly” third-quarter economic performance that showed weakening domestic demand could give the BSP a reason to frontload its policy easing with a 50-bp reduction next month if inflation stays manageable.
Meanwhile, Security Bank’s Mr. Taningco said an outsized or off-cycle cut is unlikely “so as not to exert sharp peso depreciation pressure especially with Fed Chair [Jerome H.] Powell’s hawkish guidance.”
“At this stage, however, we see BSP sticking to 25-bp increments as opposed to delivering 50-bp in one go, given currency weakness (USD/PHP hit a record high after the Q3 GDP data release) and our view of a Fed pause in December,” Nomura Global Markets Research analysts Euben Paracuelles and Yiru Chen likewise said in a note on Monday.
“Still, we continue to see a risk of BSP delivering additional policy rate cuts next year, if the more “severe scenario” materializes, including a delay in the enactment of the 2026 budget and/or a slow resolution to the scandal.”
The peso hit a record low of P59.13 on Oct. 28. Prior to the GDP report, it rebounded to the P58 level, but slid to the P59 range anew following the data release, closing at P59.04 on Friday.
The Fed last month cut rates by 25 bps for a second time in a row to bring its target rate to the 3.75%-4% range. However, Mr. Powell said another reduction in December remains up in the air amid the lack of clarity about the economy due to the lack of data amid the US government shutdown.
This widened the differential between the US central bank and the BSP’s key rates to 75 bps.
Metrobank’s Mr. Mapa said that while another cut from the BSP next month could again narrow the rate gap and put pressure on the currency, “we believe this is one development monetary authorities would need to weather as the economy appears in need of as much support it can get.”
“(This) is something BSP will be willing to deal with in order to support moderating growth momentum.”
Moody’s Analytics’ Ms. Tan said the BSP is expected to adjust its policy settings only during its scheduled meeting “to maintain clarity and market stability.”
She added that the Fed’s hawkish stance and the weak peso could give the BSP less elbow room to ease.
“Another rate cut could add downward pressure on the currency, as lower yields make peso assets less attractive to investors. The BSP will likely continue easing, but it will do so cautiously, supporting growth while guarding against excessive peso volatility.” — Katherine K. Chan
