Inflation surprise boosts odds of return to easing

FEBRUARY's lower-than-expected consumer price growth has increased the likelihood of the Bangko Sentral ng Pilipinas (BSP) resuming its easing cycle, analysts said, despite the likelihood of a continued pause by the US Federal Reserve.

"In terms of monetary policy conditions, things were still somewhat tight last year, despite the three policy rate cuts by the BSP last year. So we still have room to do better this year," Citi economist Nalin Chutchotitham told reporters on Thursday.

"This year, we expect the BSP to cut three times within April, August, and then December," she added.

February's decision to pause, Chutchotitham noted, was due to the central bank being cautious amid "a lot of global uncertainties."

With inflation likely to remain within the 2.0- to 4.0-percent target this year, particularly given lower rice import tariffs, Philippine monetary authorities actually have room to keep lowering key interest rates, she said.

Consumer price growth eased to 2.1 percent last month due to lower food prices as well as utility and transport costs, below the BSP's 2.2- to 3.0-percent estimate for the month.

In a statement issued late Wednesday, the central bank said the outturn supported its "prevailing assessment that inflation will remain within the target range over the policy horizon."

Uncertainty over "global economic policies and their potential impact on the domestic economy continue to warrant close monitoring," it added.

"The BSP will carefully consider all new available information at its upcoming monetary policy meeting on 3 April 2025."

Citi Philippines CEO Paul Raymond Favila, meanwhile, said concerns that the peso could substantially weaken as a result of rate cuts were overblown.

"Everybody keeps on saying that because of the expectations of looser monetary policy, then the peso is going to depreciate and hit P60 [or] P62... I take the opposite view on that," he said.

"The world is much more complicated than just interest rate differentials. You have to take a look at what's actually happening to the larger picture."

Chutchotitham said that Citi expects the peso to trade at P58.8:$1 this year and could to appreciate to around P56 against the dollar in 2026.

HSBC Global Research economist Aris Dacanay, meanwhile, said that "with inflation finding itself within the lower-end range of the BSP's target band, there is room for the economy to absorb any FX-induced inflation if the policy rate differential between the BSP and the Fed were to narrow."

"Given low inflation, we believe the BSP has room to rebalance its risks from FX stability and inflation to supporting growth," he added.

The central bank could even resume easing ahead of its next rate-setting meeting in April, Dacanay said.

Bank of the Philippine Islands senior economist Emilio Neri also said that slowing inflation had kept the door open for BSP rate cuts, especially if first quarter economic growth data falls short of expectations.

The government is aiming for 6.0- to 8.0-percent gross domestic product (GDP) growth for 2025. Preliminary first quarter GDP data will be released in May.

However, Neri said that the space for easing this year remained limited.

"Uncertainties abroad remain a key concern, making the peso vulnerable given the country's substantial current account deficit," he said.

"Maintaining interest rates at appropriate levels may offset the impact of these uncertainties."