MUFG sees room for further policy easing

THE BANGKO SENTRAL ng Pilipinas (BSP) could further lower interest rates this year to bolster economic growth amid benign inflation and global trade uncertainties, MUFG Global Markets Research said.

“Growing trade headwinds will keep many regional central banks in a policy easing cycle to support growth, amid contained inflation,” it said in a recent report.

“We expect BSP to cut the policy rate by another 50 bps (basis points) in the rest of this year, given rapidly moderating inflation.”

If realized, this would bring the benchmark rate to 4.75% by end-2025, the lowest in nearly three years.

The central bank has lowered borrowing costs by a total of 125 bps since it began its rate-cutting cycle in August last year.

The Monetary Board’s next policy review is set for Aug. 28.

MUFG also noted the latest signals from BSP Governor Eli M. Remolona, Jr., who had said there is room for two more rate cuts this year due to manageable inflation.

MUFG expects headline inflation to average 1.8% this year, slightly higher than the central bank’s projection of 1.6%.

Headline inflation picked up to 1.4% in June from 1.3% in May but slowed from 3.7% a year ago. This brought the six-month average inflation to 1.8%.

However, MUFG warned that the BSP “could be constrained in an oil price shock scenario.”

In a separate report, MUFG said it expects a “dovish bias” from the BSP due to “risks tilted slightly to more cuts” amid the tariffs.

The tariff rate was a downside surprise for MUFG’s foreign exchange and macroeconomic forecasts, MUFG said, as it expected the Philippines to strike a better trade deal with the US.

“We were implicitly expecting a trade deal between the US and the Philippines with a small bilateral trade deficit between the two countries,” it said.

The US set a 19% tariff on Philippine goods, following a meeting between US President Donald J. Trump and President Ferdinand R. Marcos, Jr. last week. This will take effect on Aug. 1.

“Over the medium term, with tariff rates closer to 20%, the marginal incentive to shift some manufacturing to the Philippines also becomes less compelling, even as we highlight that we were not assuming a substantial manufacturing shift for the Philippines as our base case to begin with.”

“In other words, relatives matter, but so do the opportunity costs for the Philippines,” it added.

The US is a top export destination for Philippine goods, accounting for around 16% of total exports in the five-month period, primarily semiconductors and electronic products.

“We also note that the US is quite an important export market for the Philippines in many sectors including leather, furniture, toys and sports equipment, and textiles, but conversely, the Philippines is not a dominant supplier for the US across different product categories.”

“Put differently, if tariff rates were to rise meaningfully higher relative to other countries, the incentive for US importers to substitute across countries from the Philippines may start to weigh on exports.”

Meanwhile, MUFG expects the peso to settle at P56 against the dollar in the third quarter and P55.5 in the fourth quarter.

“Beyond tariffs, the positive factors we highlighted previously including rising foreign direct investment approvals, manageable inflation and domestic rice prices, coupled with forecast of further US dollar weakness are still supportive of the Philippines peso.” — Luisa Maria Jacinta C. Jocson