Citi Philippines said it expects the Bangko Sentral ng Pilipinas to cut its key interest rates by 75 basis points in 2025 despite the recent uptick of inflation.
“While there are still some upside risks stemming from scheduled increases in electricity charges in January to Mar, we continue to expect 2025 inflation to be well within policy target at 3.1 percent [vs. earlier forecast of 2.8 percent]. The current policy rate remains relatively high, and given the time lag in monetary policy, we expect the BSP to continue with its gradual 25bp rate cuts in February 2025, Q2 and Q3,” Citi Philippines said in a report.
The bank noted that the BSP reduced its meetings to six times this year from seven times in 2024 to allow time for data-gathering.
Data from the Philippine Statistics Authority (PSA) showed that headline inflation rose to 2.9 percent year-on-year in December 2024, faster than 2.5 percent in November.
This was mainly due to higher household electricity and oil prices, and most of the other categories registered little changes. Overall, food inflation was stable at 3.4 percent, as lower rice inflation helped to offset other increases.
The pick-up in inflation was not broad-based, despite a higher core inflation, which rose from 2.5 percent in November to 2.8 percent in December, reflecting increases in food inflation.
“2024 annual inflation was well within target at 3.2 percent vs. 6.0 percent in 2023. This was partly thanks to the BSP maintaining a tight monetary stance since late 2023. Another important factor was the government’s extension of tariff reduction on several food items [especially rice] through 2028, which likely contributed to lowering inflation expectations,” Citi Philippines said.
“We revised up 2025 inflation from 2.8 percent to 3.1 percent on the back of planned increases in electricity rates during the first half of 2024, noting also potential further adjustments in the remainder of the year, although this may be partly offset by potentially lower oil prices. We also adjust 2026 inflation forecast slightly higher to 3.2 percent from 3.0 percent earlier,” the bank said.
“We expect the BSP to continue to cut policy rates by 25 bp at the Feb meeting to 5.50 percent. With 2025 inflation expected to be well within target, absent large shocks, the expected real policy rate still appears fairly tight by historical standard. GDP is expected to grow 6.0 percent this year, close to the potential level, concerns for demand-pulled inflation remains manageable, in our view,” Citi said.
“We also adjust our expectation for rate cuts to Feb, June [earlier: May], August, spacing out for Q1, Q2, and Q3, allowing the BSP time to check the pulse of domestic demand, given the upcoming general elections in May, as well as external factors, including the Fed’s rate cuts. We expect 50bp more likely to follow in 2026 if inflation stays close to the target mid-point, thus bringing real policy rate closer to historical level and continue to support economic growth,” Citi Philippines said.
