By Luisa Maria Jacinta C. Jocson, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) on Thursday cut policy rates for the first time in nearly four years amid an improving inflation outlook.
The Monetary Board on Thursday reduced the target reverse repurchase (RRP) rate by 25 basis points (bps) to 6.25% from the over 17-year high of 6.5%. This was in line with the expectations of nine out of 16 analysts surveyed in a BusinessWorld poll last week.
Rates on the overnight deposit and lending facilities were also lowered to 5.75% and 6.75%, respectively.
This was the first time that the BSP reduced rates in close to four years or since November 2020, when it last delivered a 25-bp cut amid the coronavirus disease 2019 (COVID-19) pandemic.
“With inflation on a target-consistent path, the current macroeconomic outlook supports a calibrated shift to a less restrictive monetary policy stance,” BSP Governor Eli M. Remolona, Jr. said at a briefing.
He said the BSP remains “mindful of lingering upside risks to prices.”
“The balance of risks to the inflation outlook continues to lean toward the downside for 2024 and 2025 with a modest tilt to the upside for 2026,” Mr. Remolona said.
The BSP adjusted its baseline forecasts to 3.4% for 2024 (from 3.3% previously), 3.1% for 2025 (from 3.2% previously), and 3.2% for 2026 (from 3.3% previously).
It also revised its risk-adjusted inflation forecasts for 2024 to 3.3% (from 3.1% previously), and 2.9% for 2025 (from 3.1%). The risk-adjusted forecast for 2026 was set at 3.3%.
Despite inflation accelerating to 4.4% in July, Mr. Remolona said inflation is expected to trend downward to within the government’s 2-4% target range.
“The downside risks are linked mainly to lower import tariffs on rice, while upside risks could come from higher electricity rates and external factors,” he added.
In June, President Ferdinand R. Marcos, Jr. ordered that tariff on rice imports be lowered to 15% until 2028 from 35% previously.
Rice inflation, which accounts for nearly half of overall inflation, eased to 20.9% in July from 22.5% a month prior. This marks the fourth straight month of slower rice inflation.
Mr. Remolona also noted the impact of the latest economic growth figures on the decision to begin easing rates. The economy expanded by 6.3% in the second quarter, faster than 5.8% in the previous quarter and 4.3% a year ago.
“We’re somewhat more confident in the inflation numbers coming down than in the gross domestic product (GDP) numbers going up,” he said.
“Consumption was relatively weak. So, it doesn’t look like something that could easily be sustained. And so we went for a cut, partly because of that.”
Household consumption, which accounts for about three-fourths of the economy, slowed to 4.6% in the second quarter from 5.5% a year ago.
“Despite tight financial conditions, second-quarter GDP growth has been solid, and the unemployment rate has declined. Public investment alongside easing price pressures and robust employment conditions are expected to support economic activity,” Mr. Remolona added.
OUTLOOKMeanwhile, the BSP chief signaled another 25-bp cut for the remainder of the year.
“My views have been consistent with a 25-bp cut today and another 25 bps sometime during the year, either in October or December. And we’ll see what happens in 2025,” Mr. Remolona said.
“By the way, the most relevant policy horizon for us is actually 2025 when looking at inflation, because there are long lags in the transmission mechanism of monetary policy. The decision we made today (Thursday) will mainly affect 2025,” he added.
The Monetary Board’s remaining policy-setting meetings this year are on Oct. 17 and Dec. 19.
Mr. Remolona said he also expects the US Federal Reserve to begin cutting rates next month.
“Possibly, 50 bps in September and then 100 bps until the end of 2024. And then maybe another 125 bps in 2025,” he said.
Mr. Remolona noted the impact of the interest rate differential once the Fed begins cutting rates.
“That would mean a wider differential. You know, the (US) policy rate is below our policy rate. But if they cut by more than we do, then the differential will be even wider. That may exert pressure on the peso a little bit. But given that the peso has been appreciating already, it’s not a big deal.”
Mild US inflation readings this week have cemented hopes that the Federal Reserve will lower borrowing costs in September for the first time in four and a half years, Reuters reported.
Mr. Remolona said the central bank is trying to avoid any off-cycle moves. “Off-cycle decisions are either you think you fell behind the curve or you think you’re facing a hard landing. Otherwise, we avoid off-cycle decisions.”
BIGGER CUTS?Meanwhile, Gareth Leather, senior Asia economist at Capital Economics, said he expects 25-bp cuts each at the Monetary Board’s last two meetings for the year.
“With inflation set to drop back further and growth likely to struggle, we expect another 50 bps of cuts before the end of the year,” he said in a note.
Easing price pressures will help reinforce the BSP’s decision to reduce rates further, Mr. Leather said.
“We expect inflation to drop back to target in August on the back of beneficial base effects and remain low throughout the rest of the year. If we are right, this should give the central bank the confidence it needs to loosen policy further over the coming months,” he said.
Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said that with the Fed expected to also begin its easing cycle, this may give the BSP room to deliver bigger rate cuts.
“We now see the Board cutting by a further 25 bps each in October and December, though the chances of much larger 50-bp moves, particularly in December, likely will rise if we’re right about the Fed pursuing more aggressive easing in the fourth quarter,” he said in a note.
The BSP can also continue cutting rates through next year, he added.
“All told, the BSP will have much more room for more rate cuts next year; our inflation forecasts see the annual average dropping further to 2.5% in 2025 from an estimated 3.5% this year, down from 6% in 2023,” Mr. Chanco said.
“The urgency and onus on the BSP to start providing the economy with some support is clear, especially with fiscal policy still constrained by the lagging consolidation efforts from the pandemic-era budget blowout.”