BSP drops interest rates 25bp

The Bangko Sentral ng Pilipinas (BSP) [link], the country’s central bank and the organization in charge of setting interest rates to maintain price stability, dropped the policy interest rate 25 basis points from 5.50% to 5.25%. The BSP also dropped its FY25 inflation forecast from 2.4% to 1.6%. 

> Will there be more cuts?  Eli Remolona, the BSP Governor, said that any further cuts would be “data dependent”. He said that the BSP will “probably cut once more”, but that it “may cut twice more” or “not at all” depending on how the inflation and economic data look as the year progresses. 

> Expectations:  The general sentiment had been that the BSP would cut rates, encouraged both by the lower inflation prints over the previous months, but also the country’s sub-optimal economic growth. Of those economists who predicted the BSP would cut rates, none (that I saw) predicted more than a 25 basis point cut.

> How about the Fed?  The US Federal Reserve (the Fed) decided to keep rates unchanged as it waited to assess the impact of Trump’s clumsy trade war(s) on prices, given that tariffs are a tax on American consumers that put upward pressure on prices. The median forecast of the FOMC (the committee within the Fed in charge of actually setting the rate at these meetings) was approximately 50 basis points of further cuts in FY25, but according to this post by ZeroHedge on Twitter, there are a good number of Fed officials who think that there may not be any cuts at all in FY25 [link]. The number of Fed officials predicting zero cuts in FY25 increased from 4 to 7 since the last FOMC meeting.

  MB BOTTOM-LINE:  A rate cut in this environment is a huge relief to businesses and consumers. I’m a little concerned about how flippant Mr. Remolona sounds about future cuts, especially considering the BSP appears to have misread the situation and is once again playing catch-up to pull the inflation rate back into its target range of 2% to 4%. Considering our inflation was not demand-driven (but was instead a result of governmental supply chain mismanagement), why isn’t the BSP as aggressive in cutting the rate now that it’s clear that both inflation and growth are projected to be too low? The traditional worry about cutting when the Fed holds steady is the devaluation of the peso, but if Mr. Remolona’s remarks about letting the peso find its natural value without intervention from the BSP are true reflection of the BSP’s stance, then I just don’t see the reason (or reasons) for the BSP’s hesitancy on this side of the inflation crisis.
 

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