BSP cuts policy rates by 25 basis points

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) on Thursday decided to reduce policy rates by 25 basis points, the first cut in nearly four years and the first adjustment since the off-cycle hike in October 2023.

The target reverse repurchase (RRP) rate was cut to 6.2%, while the overnight deposit rate was adjusted to 5.75%, and the overnight lending facility rate was set at 6.75%.

This is the first adjustment since the 25-basis point off-cycle hike in October 2023, and the first cut since the 25-basis point reduction in November 2020.

“The balance or risks to the inflation outlook continues to lean toward the downside for 2024 and 2025 with a modest tilt to the upside for 2026,” BSP Governor Eli Remolona Jr. told reporters in a briefing in Manila City.

“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.

This comes as the central bank hiked its risk-adjusted inflation forecast for 2024 to 3.3% from the 3.1% outlook in June. The latest data available showed inflation clocked in at a nine-month high of 4.4% 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,” Remolona said.

In May, Remolona hinted at the possibility of easing rates in August, as he said the central bank was then “less hawkish,” with the latest economic growth data pointing to “largely intact” domestic output growth in the medium term.

The Philippine economy grew by 6.3% in the second quarter, its strongest showing in five quarters, thanks to strong consumption activities during the period.

On Thursday, however, Remolona said that the central bank was more confident in the deceleration of inflation than the acceleration of the economy.

“[I'm] somewhat more confident in the inflation numbers coming down than the GDP (gross domestic product) numbers going up,” he said.

The BSP also reduced its risk-adjusted inflation forecast for 2025 to 2.9% from 3.1% previously and announced a 3.3% forecast for 2026. 

For its baseline forecasts, the central bank expects inflation to average 3.4% this year, higher than its previous outlook of 3.3%.

This is expected to decelerate to an average of 3.1% in 2025 before accelerating slightly to 3.2% in 2026.

While he only has one vote in the Monetary Board, Remolona said that another 25-basis point cut could come later in 2024, either during the next meeting on October 17 or the one scheduled for December 19.

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

Following the announcement, Capital Economics senior Asia economist Gareth Leather said inflation is expected to fall back within the 3.0% to 4.0% target range in August.

''Overall, we are expecting a 25bps cut in the BSP’s two remaining meetings of the year in October and December. Our forecasts are more dovish than the consensus,” he said in a separate commentary. 

Metropolitan Bank & Trust Company (Metrobank) chief economist Nicholas Mapa, in a separate post, said that he expects two more cuts this year.

''[The] compelling factor for the early cut centers on the push to support growth momentum after 2Q GDP showed modest consumption and soft private investment,” he said in a post on X. —VBL, GMA Integrated News