BSP ends standstill with 25-bp rate cut

MANILA, Philippines —  The Bangko Sentral ng Pilipinas (BSP) commenced its easing cycle yesterday, delivering a 25-basis-point (bp) interest rate cut as inflation pressures recede and expectations remain anchored over the policy horizon.

In a press conference following its fifth policy review this year, BSP Governor Eli Remolona Jr. said the Monetary Board decided to lower the target reverse repurchase rate to 6.25 percent from a 17-year high of 6.5 percent.

Likewise, the overnight deposit and lending rates were reduced to 5.75 percent and 6.75 percent, respectively.

Remolona said headline inflation is projected to trend downward within the government’s two to four percent target this year despite the uptick in July.

“With inflation on a target-consistent path, the current macroeconomic outlook supports a calibrated shift to a less restrictive monetary policy stance. Nonetheless, monetary authorities remain mindful of lingering upside risks to prices,” he said.

The BSP chief said the balance of risks to the inflation outlook continues to lean toward the downside for 2024 and 2025 as forecasts remain well within the two to four percent target.

“The downside risks are linked mainly to lower import tariffs on rice, while upside risks could come from higher electricity rates and external factors,” the BSP said.

The BSP raised its risk-adjusted inflation forecast for 2024 to 3.3 percent from 3.1 percent in the previous meeting in June, while the risk-adjusted inflation forecast was lowered to 2.9 percent in 2025 from 3.1 percent.

However, Remolona said there is a modest upside for 2026 as the BSP sees the risk-adjusted forecast at 3.3 percent.

Headline inflation averaged 3.7 percent in the first half, within the BSP’s two to four percent target, despite rising to 4.4 percent in July from 3.7 percent in June.

Likewise, core inflation, which strips the volatile oil and food prices, averaged three percent in the first half after easing to 2.9 percent in July from 3.1 percent a month prior.

The BSP chief said that even if inflation breached the two to four percent target last month, the July inflation at 4.4 percent was entirely expected in their calculations.

“The July inflation was not a surprise. In the same manner, we expect inflation to be well-within the target range for the July and August numbers. We think we are still justified in reducing the policy rate,” he said.

Remolona also said the Monetary Board expects domestic demand prospects to hold firm even as private consumption slowed to 4.6 percent in the second quarter from 5.5 percent a year ago.

He added that despite tight financial conditions, second-quarter gross domestic product (GDP) growth has been solid and the unemployment rate has declined.

GDP expanded by 6.3 percent in the second quarter.

“Public investment alongside easing price pressures and robust employment conditions are expected to support economic activity,” he said.

Going forward, the Monetary Board will continue to take a measured approach in ensuring price stability conducive to balanced and sustainable growth of the economy and employment, Remolona said.

Gareth Leather, senior Asia economist at Capital Economics, said he expects another 50-bp cut before the end of the year.

“The weak GDP figures released last week suggest that the economy would certainly benefit from further easing as growth slowed to just 0.5 percent quarter-on-quarter on the back of a contraction in private consumption and exports,” he said.

Price pressure is also expected to ease in the coming months due to base effects and may remain low throughout the rest of the year, the economist said.

“If we are right, this should give the central bank the confidence it needs to loosen policy further over the coming months,” he said. “Overall, we expect a 25-basis-point cut in the BSP’s two remaining meetings of the year in October and December.”

The BSP will next meet on Oct. 17 and Dec. 19.