Economists believe that after inflation dropped in September, the Bangko Sentral ng Pilipinas (BSP) will announce one to two more policy rate cuts at its two remaining monetary policy meetings for the year

HSBC economist Aris Dacanay said the BSP will likely announce one more policy rate cut either during its meeting on 16 October or in December. His statement came after the BSP cut its policy rate by 25 basis points to 6.25 percent in August.

Battle is over

“We think the September level marks the day that the BSP’s inflation battle is finally over,” he said.

“With an even better inflation outlook on the horizon, the risk of the BSP cutting its policy rate again twice this year is largely increasing,” added Dacanay.

Inflation in September slid to 1.9 percent from 3.3 percent in August as prices of food, fuels, and utilities, Philippine Statistics Authority (PSA) data show.

Inflation drop below set estimates

Latest inflation print was below HSBC’s estimate of 2.5 percent and BSP’s 2 to 2.8 percent for that month.

The central bank targets inflation to stabilize within 2 to 4 percent as a range conducive to spur healthy levels of consumption among households and businesses while maintaining affordable costs of goods and services.

Due to possible cheaper prices of most goods and services, Dacanay said the BSP will not need to impose big cuts on its policy rate to prevent inflation from rising again due to consumers’ overspending.

“The BSP cooled an overheating economy back in 2023 and anchored inflation expectations by hiking policy rates aggressively by 450 basis points,” he said.

Dacanay said rice prices, in particular, could fall further as India releases more exports of the commodity and the Philippines’ lower tariff on imported rice at 15 percent from 35 percent takes full effect.

Better outlook for rice supply

“India, the world’s largest exporter of rice, just lifted its trade restrictions on the grain. A better outlook for the global supply of the grain should help grease things up for retail rice prices to finally slide,” he said.

Since the government imposed the new tariff in July, HSBC data showed rice prices have ranged from P45 to P55 per kilo which are still higher than the target of P29 per kilo for the poor set by the National Economic and Development Authority.

However, Dacanay said prices of non-food and non-volatile items under core inflation continued to decline clearly over nine months to 2.4 percent.

Two more cuts

On the other hand, Bank of the Philippine Islands chief economist Jun Neri said he expects two more BSP rate cuts this year, although in small sizes, to drive more business activities for higher economic growth.

BSP Governor Eli Remolona Jr. had said a one-time reduction of 50 basis points would mean a hard landing or an inflation spike which he said the central bank does not see.

“We expect inflation to remain under control, potentially staying below three percent in the absence of supply shocks. This favorable condition could extend into 2025,” Neri said.

The economist said consumer spending will likely remain healthy as banks set aside some funds to deposit with the BSP to prevent too much liquidity among household and corporate borrowers amid projected lower interest rates and borrowing costs due to lower reserve requirement ratios (RRR) for banks.

Robust liquidity management

“A one percent cut in the RRR is equivalent to P150 billion in deposits which banks can use for lending. However, the BSP has robust liquidity management tools in place to absorb any excess funds released into the system,” Neri said.

He expects inflation in the next months to slightly increase to reach 3.2 percent for the full year and 2.8 percent in 2025.

With possible two more BSP rate cuts, Neri projects the central bank’s current policy rate of 6.25 percent to hit 4.5 to 5 percent by end-2025.

Neri said the BSP will continue to monitor global economic uncertainties, including tensions in the Middle East, in adjusting its policy rate.