A Steady Inflation Rate Sparks Debate: Should the BSP Cut Interest Rates in December?
The recent economic data has analysts divided, with some arguing for a rate cut to boost growth and others cautioning against it.
Inflation remains steady at 1.7%, well below the BSP's target range of 2.0% to 4.0% for the eighth consecutive month. This stability, coupled with a potential slowdown in economic performance during the third quarter, has sparked a debate among experts.
The preliminary GDP growth data for Q3, to be released soon, is expected to show a decline from the robust 5.5% growth in Q2. This slowdown is attributed to the impact of recent natural disasters and a scandal involving a flood control project.
Here's where it gets controversial: With GDP growth currently hovering just below the government's target range of 5.5% to 6.5% for 2025, should the BSP intervene with a rate cut to stimulate the economy?
Jun Neri, lead economist at BPI, believes a 25-basis-point rate cut in December is a plausible move, especially if the Q3 growth report highlights continued economic weakness.
Aris Dacanay, an economist at HSBC Global Research, shares a similar view, citing steady inflation and clearer rice policies as factors strengthening the case for a rate cut.
"This aligns with our baseline view of a 25-basis-point policy rate reduction to 4.50% by year-end," Dacanay said.
However, Dacanay also highlights the importance of monetary policy having the flexibility to respond to economic challenges, especially with no immediate inflation concerns.
And this is the part most people miss: A 10% decline in public infrastructure spending, as estimated by Dacanay, could significantly impact economic growth, reducing it by 0.4% to 0.6% points.
Neri adds that if economic growth continues to fall short of its potential, we could see up to two more rate cuts in the first half of 2026.
"The BSP may also consider aligning with a potential Fed pivot, especially if deeper US rate cuts are priced in once Chair Powell's term ends in May 2026," Neri suggests.
With the government targeting a GDP growth of 6.0% to 7.0% for next year, the decision to cut rates in December becomes a critical one.
So, what do you think? Should the BSP take action now to stimulate growth, or is it better to wait and see? We'd love to hear your thoughts in the comments below!
