The Bangko Sentral ng Pilipinas (BSP) on Thursday cut the policy rate for the first time in nearly four years, becoming one of the first central banks in Asia to kick off what Governor Eli Remolona Jr. expects to be a “gradual” easing cycle.
At its meeting yesterday, the powerful Monetary Board (MB) slashed the BSP’s key rate by 25 basis points (bps) to 6.25 percent, unwinding previous tightening actions that brought the number to an over 17-year high of 6.5 percent.
The last time that the central bank cut the policy rate was back on Nov. 19, 2020, when a pandemic-induced recession prompted the BSP to bring down borrowing costs to a record low.
READ: BSP cuts policy rate, a first in almost 4 years
In a statement, the MB said the BSP would aim for a “calibrated” shift to a less restrictive monetary policy stance.
That means the market can expect a “gradual” easing cycle, Remolona told a press conference as he floated the possibility of another 25-bp rate reduction either at the Oct . 17 or Dec. 19 rate setting meeting of the MB.
The BSP chief also said monetary authorities would avoid “off-cycle” decisions that may risk stirring up market fears that the economy is headed for a hard landing.
“To me, it means we’re moving along the path that we expected. There’s no bad surprise.
There’s no good surprise,” he said.
Banks use the BSP’s benchmark rate as a guide when charging interest rates on loans.
By bringing down borrowing costs, the BSP wants to stimulate bank lending to boost consumer spending and investments.
Not a big dealThe decision of the BSP took into account the latest government data showing inflation had bolted to 4.4 percent in July, the first time this year that price growth had breached the central bank’s 2 to 4 percent target range.
But the BSP said inflation was still projected “to trend downward” despite the flare-up last month.
The BSP’s action also took into account the 6.3 percent year-on-year economic growth in the second quarter—which was magnified by favorable base effects that masked what Socioeconomic Planning Secretary Arsenio Balisacan had described as “anemic” consumption.
The outcome of yesterday’s MB meeting put the BSP ahead of the US Federal Reserve in cutting rates without worrying about the peso. As it is, the Fed is widely expected to make its own easing move in September, with recession fears stoking worries of an aggressive easing episode stateside.
“Given that the peso has been appreciating already, it’s not a big deal,” Remolona said.
Moving forward, Miguel Chanco, economist at Pantheon Macroeconomics, said “more—and potentially larger—cuts” could come in the fourth quarter of the year because economic growth is “undeniably struggling.”
”We now see the Board cutting by a further 25 bp 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,” Chanco said.