The Bangko Sentral ng Pilipinas (BSP) cut rates by 25 bps (0.25%) yesterday, Aug, 15, finally marking the beginning of the easing cycle as both inflation and economic growth start to cool from post-pandemic distortions. The BSP emphasized in its statement that while inflation pressures remain, risks remain tilted to the downside, which gives them enough confidence to take a calibrated approach to gradually easing policy measures.<\/p>\n\n\n\n
The BSP likewise adjusted its 2024 risk-adjusted inflation forecast up by 10 bps to
3.4%, likely to account for the inflation bump seen in July, and make downward adjustments of 10 bps each to both the 2025 and 2026 forecasts. We maintain our 3.6% inflation forecast for 2024 and our inflation forecasts for the next two years remain higher than the BSP\u2019s at 3.3% and 3.5% respectively.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
Investors have begun pricing-in this rate cut since the start of August, as evident in the movements of the property and financial subindices. This trend will likely continue in the coming weeks and months, but we acknowledge that this rate cut is at least halfway priced-in already.<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
We maintain our forecast that the BSP will implement two 25 bps (0.25%) rate cuts this year, and we expect the next one to follow in December. 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 Fed to normalize after the US central bank cuts its rates in September. <\/p>\n\n\n\n
If this 50 bps (0.50%) cut for the year becomes a reality, that would pave the way to our 2024 index target of 7,355. <\/strong><\/p>\n\n\n\n In the unlikely event that yesterday’s rate cut becomes the last cut for 2024, our index target would be 7,108.<\/strong><\/p>\n\n\n\n