Below-5% policy rate risky for economy–BPI economist
MANILA, Philippines — Bringing down the local policy rate to below 5 percent might bring dangers to the economy, like the emergence of “zombie” companies that are saddled with debts and only living off cheap loans, economists at the Bank of the Philippine Islands (BPI) said.
It was a warning that BPI lead economist Emilio Neri Jr. previously issued when the Bangko Sentral ng Pilipinas (BSP) had slashed the key rate to historic-low of 2 percent during the pandemic. And he repeated the cautionary advice on Wednesday as the BSP navigates a new easing cycle.Neri said in a virtual press chat the neutral rate for the BSP could be “close to 5 percent”, adding that too much easing beyond that level might do more harm than good to the economy.
Apart from the rise of zombie firms, Neri said the other side effects of a prolonged period of low interest rates are excessive risk-taking and widening social inequality as wages could not cope with the surge in prices of property and other assets.
“If you go lower than that, lower than 4 or 3 percent like we did back in the previous episode, then we could again subject the economy to the dangers of misallocation of resources, the risk of zombie firms re-emerging, and inequality even worsening further,” he said.
READ: Beware of ‘zombie’ firms, BPI economist warns
“But so far, we’re still at okay levels for rates,” he added.
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Last February, the Monetary Board –– wary of global trade uncertainties –– kept the policy rate that banks typically use as a guide when pricing loans at 5.75 percent.
The surprise decision had punctuated back-to-back easing moves back in 2024, when the key rate was slashed by a total of 75 basis points (bps) to perk up economic growth. But at the current level of 5.75 percent, the local policy rate was still among the highest in the region.
That said, BSP Governor Eli Remolona Jr. told Bloomberg earlier this week that there was a “good chance” of a quarter-point interest rate cut at the April 10 meeting of the MB, as inflation continued to ease while the peso became less of a problem for the central bank.
For Neri, the BSP might cut by a total of 50 bps this year. Another quarter-point reduction was possible in 2026 if the economy significantly slows amid the external headwinds.
“But if growth becomes too slow, then maybe they can cut some more. But not by much anymore,” he said.
