Nomura: BSP may hit pause when rate falls to 5%

The Bangko Sentral ng Pilipinas (BSP) might hit the brakes on monetary policy easing once the key rate falls to 5 percent, Nomura said, adding that the central bank’s next moves will be largely driven by the inflation outlook.

In a commentary, the Japanese investment bank said it expects the BSP to further cut the benchmark rate by 25 basis points (bps) each in its last two policy meetings of the year in October and December.

Beyond that, Nomura said the central bank might ease again in its first three meetings in 2025 before pausing.

That would bring the cumulative cuts—including the initial 25-bp reduction at the Aug. 15 meeting—to 150 bps under the current easing cycle, which would bring the key rate to 5 percent by May next year.

”The next moves by BSP will largely be driven by the inflation outlook—if inflation continues on a downward path, BSP can look to further remove the restrictiveness in the monetary stance to support a recovery in domestic demand and overall growth,” Nomura said.

First cut

At its Aug. 15 policy meeting, the powerful Monetary Board (MB) decided to cut the BSP’s target reverse repurchase rate for the first time in nearly four years to 6.25 percent.

The decision of the BSP came after government data showed inflation had accelerated to 4.4 percent in July, the first time this year that price gains had pierced through the central bank’s 2- to 4-percent target range. But the BSP had said the lower tariff on rice, a staple food for Filipinos, would help inflation go on a downtrend starting this month.

The BSP’s action also took into account the 6.3-percent year-on-year economic growth in the second quarter. Analysts said the reading was flattered by favorable base effects, which masked a weakening consumption amid tight financial conditions.

In a statement, the MB said the BSP would aim for a “calibrated” shift to an easy monetary policy stance. That means the current easing cycle would be a “gradual” one, Governor Eli Remolona Jr. said without ruling out the possibility of another 25-bp reduction either at the October or December policy meeting of the MB.

Moving forward, Nomura said a possible rate cut by the US Federal Reserve in September would give the BSP more room to further relax monetary policy at its next meetings.

“We continue to think the Fed turning dovish will play a role, and its easing cycle underway from September, as our US team expects, should support further BSP’s consecutive rate cuts in the coming months,” the Japanese bank said.