After the Bangko Sentral ng Pilipinas (BSP) slashed rates by 25 basis points (bps) on 15 August, traders are betting on another similar adjustment before the end of the year.
AP Securities said it is maintaining its forecast that the BSP will implement two 25 bps rate cuts this year, “and we expect the next one to follow in December.”
Its forecast is that the central bank will likely hold during the October meeting to fully assess the initial effects and to allow the interest rate differential with the US Federal Reserves to normalize.
“If this 50 bps cut for the year becomes a reality, that would pave the way to our 2024 index target of 7,355. In the unlikely event that a single cut will be implemented for 2024, our index target would be 7,108,” according to the brokerage house.
The BSP’s move marked the beginning of the easing cycle as both inflation and economic growth started to cool from post-pandemic distortions.
AP Securities said the BSP gave emphasis in a recent statement that while inflation pressures remain, risks remain tilted to the downside, which gives the central bank enough confidence to take a calibrated approach to gradually easing policy measures.
Adjusted forecasts
The BSP likewise adjusted its 2024 risk-adjusted inflation forecast up by 10 bps to 3.4 percent, likely to account for the inflation bump in July, and make downward adjustments of 10 bps each to both the 2025 and 2026 forecasts.
The stock broker said: “We maintain our 3.6 percent inflation forecast for 2024 and our inflation forecasts for the next two years remain higher than the BSP’s at 3.3 percent and 3.5 percent, respectively.”
“We have been calling for an August rate cut for at least two months now, and now that it is finally upon us, we expect the market to react positively. However, note that this is not a magic bullet that will give the market a sudden shot in the arm,” it added.
Investors have begun pricing-in this rate cut since the start of August, as evident in the movements of the property and financial sub-indices.
The trend will likely continue in the coming weeks and months, but the rate cut is at least halfway priced-in.
“We also do not expect a magical jump in economic activity, as it would take months for the rate cut to sink fully into the economy. However, as we have mentioned before, this first cut is important for its symbolism marking the beginning of the easing cycle,” AP Securities indicated.
The BSP slashed its key rate by 0.25 percent to 6.25 percent, in-line with expectations. It was the first interest rate cut in four years.
Also reduced were the rates on overnight deposit and lending facilities to 5.75 percent and 6.75 percent, respectively.
The BSP guidance remained dovish with the BSP expecting headline inflation to trend lower to its 2 percent to 4 percent target.