DOMESTIC consumption appears to be recovering with inflation having receded and as wages and jobs gain momentum, Bank of America (BofA) said, and slower price growth will likely prompt the Bangko Sentral ng Pilipinas (BSP) to keep cutting key interest rates next year.

"Consumption growth looks to have bottomed in early 2024" and "may be a better contributor to GDP (gross domestic product) growth going forward," the bank said in a November 13 report.

Improved consumption, it added, should also translate to improved revenues for listed consumer firms, with signs already evident in the third quarter of 2024.

BofA noted that elevated inflation, unemployment, and stagnant wage growth has been weighing on consumption, which has lagged behind GDP growth.

Private consumption, which accounts for 73 percent of the country's economic growth, grew by just 4.6 percent in the first half of the year even as GDP expanded by 6.1 percent.

Growth in government spending — expected to be sustained moving forward — made up for the "growth consumption struggled to provide."

Private consumption picked up to 4.8 percent as of end-September as inflation slowed, and BofA now expects it to grow by 5.5 percent in the last three months of 2024, leading to a full-year result of 5.0 percent.

The rate is estimated to improve further to 5.4 percent in 2025.

GDP growth, in comparison, "may stay shy of 6.0 percent in 2024/25E (estimates)..."

Slowing inflation was said to be due to steadier fuel prices and the government's move to slash tariffs on rice imports. Fuel and rice weigh heavily in the computation of inflation and the effects of the tariff cuts are expected to become apparent by the first quarter of next year, which is when BofA also sees inflation to bottom out.

Wages, meanwhile, have been increased by three times over 26 months, which have allowed worker pay to catch up with inflation. Unemployment and underemployment have also trended lower and are supporting consumption.

The improvement in consumption will likely be reflected in the performance of key consumer stocks, BofA said.

"We find that private consumption growth from the national income accounts provide a good indicator of revenue growth. Having said that, we think consumption bottomed-out in 1H24, so too has revenue growth," it added.

In line with consumption having improved to 5.0 percent in the third quarter alone, revenue growth of seven consumer stocks that are part of the benchmark Philippine Stock Exchange index accelerated to 6.0 percent from 4.0 percent three months earlier, BofA said.

Lower inflation, meanwhile, will facilitate policy easing by the BSP, which began cutting key interest rates ahead of the US Federal Reserve in August.

BofA said the BSP remained on track to cut by a total of 75 basis points (bps) this year, which — following two 25-bps reductions in August and September — means one more 25-bps cut next month.

It expects four more 25-bps cuts next year, roughly one per quarter, but warned that the rate path could change should US President-elect Donald Trump's win result in a stronger dollar and an altered inflation outlook.

BSP to keep easing

Currently, however, BofA expects the BSP, along with Bank Indonesia, to keep leading an easing cycle in the Association of Southeast Asian Nations (Asean).

"We expect Asean-6 central banks to be split between the easing and stable camps evenly, with Indonesia, Philippines and Thailand being in the easing camp," BofA said in a separate report on Nov. 15.

Singapore, Vietnam and Malaysia, on the other hand, were seen to be "in the stable monetary policy camp for now."

Both the BSP and BI were seen easing interest rates "in a gradual but consistent manner in the next few quarters, broadly following the US Fed (Federal Reserve)."

The Bangko Sentral's policy rate, currently at 6.0 percent, was forecast to end 2024 at 5.75 percent and drop further to 5.0 percent by the end of next year courtesy of quarterly 25-bps cuts.

BofA said that it previously expected the benchmark rate to end this year at 6.0 percent.

"For the Philippines, the focus is more exclusively on inflation, which will dictate pace and quantum of rate cuts, while keeping an eye on the exchange rate," it said.

Easing in the region, BofA said, will likely diverge very quickly given differing inflation directions and priorities. All six central banks, however, will continue to keep a close eye on how the Fed moves, especially once Trump returns to the White House and possibly implements protectionist policies.

"The biggest uncertainty for Asean central banks is the potential impact of higher tariffs on exports and second round effects on China, which can disrupt both growth and inflation," it said.

BofA noted that the US central bank, during the first Trump presidency, had slowed the pace of policy adjustments after Washington announced tariffs on China.

A shallower-than-expected Fed cutting cycle could prompt the BSP and BI to slow the "pace and depth" of their easing, with both likely keen to keep interest rate differentials vs the Fed compelling to reduce outflow pressures."

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