BSP hints at policy rate easing by August
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may start cutting interest rates as early as August for a total of 50 basis points (bps) at the most this year, Governor Eli Remolona Jr. said on Thursday, as the recent inflation uptick was not as bad as expected.
Remolona struck a less hawkish tone after the Monetary Board, the highest policymaking body of the BSP, on Thursday decided to keep its policy interest rate unchanged at 6.5 percent, extending its pause for the fifth straight meeting.
At an event after the BSP rate setting, Remolona said the BSP may cut its key interest rates twice in the second half of the year by a total of 50 bps. He also said the BSP might even ease ahead of the US Federal Reserve.
“It’s a range of between 25 to 50 bps (total rate cuts) for the rest of 2024,” he said.
The decision to leave the overnight borrowing rate at a 17-year high was widely expected by economists. This was after inflation had quickened for the third consecutive month in April to 3.8 percent, from 3.7 percent in March, on the back of high food prices amid the El Niño onslaught and expensive transport costs.
READ: BSP keeps key rate at 17-year high as inflation risk remains
But the latest reading settled close to the lower limit of the BSP’s forecast range of 3.5 to 4.3 percent for last month.
BSP ‘less hawkish than before’
At a press conference, Remolona said the BSP was “somewhat less hawkish than before,” adding that the central bank may cut rates in the third or fourth quarter this year. The only policy meeting scheduled in the third quarter is on Aug. 15.
“Possibly [we’ll cut] by August of this year,” Remolona said of his outlook on easing.
He added that the 3.8-percent April inflation was “better than expected and better than it looks because it included positive base effects and there were other factors that were good news.”
Banks use the BSP’s policy rate as a guide when charging interest rates on loans. By making borrowing costs more expensive, the BSP wants to temper strong demand for commodities with limited supply. This, in effect, tames inflation.
The last time the BSP delivered an anti-inflation rate hike was during an off-cycle decision in October last year, when it lifted the key rate by 25 bps.
Overall, the BSP had raised its policy rate by a total of 450 bps in the current cycle, among the most aggressive in Asia.
Economic growth
Now, the BSP has also become less hawkish as data showed that economic growth is starting to weaken amid tight financial conditions.
READ: Philippine economy grew 5.7% in Q1
The local economy grew 5.7 percent year-on-year in the first quarter, faster than the revised 5.5 percent expansion in the fourth quarter of 2023 but short of the Marcos administration’s 6 to 7 percent target.
For Gareth Leather, an economist at Capital Economics, what happened on Thursday was a “dovish” meeting.
“While inflation is likely to remain elevated over the next few months, it should fall in the second half of the year on the back of an increase in the supply of agricultural products, slower economic growth, and more beneficial base effects,” Leather said.
