BSP keeps rates, but eyes 2 cuts in 2nd half

The Bangko Sentral ng Pilipinas (BSP) is eyeing to cut key policy rates twice in the second half of the year.

BSP Governor Eli M. Remolona Jr. told reporters this may be delivered in increments of 25 basis points. This means, the maximum rate cut that is expected to be delivered by the Monetary Board is 50 basis points by the end of the year.

If the BSP will cut rates by a maximum of 50 basis points, this will place key policy rates at 6 percent by the end of the year.

“Yung 50 pang ano na yun, takot na kami sa hard landing. Pero mukha namang maliit yung probability ng hard landing, soft landing [yan] [Cutting rates by 50 [bps] means we fear a hard landing. But it seems the probability of this happening is small, it would likely be a soft landing],” Remolona said. “Ang ano ng mga central bank, gradual eh. It would be 25-25. Pag 50 ibig sabihin malaki ang nangyari. Medyo pang hard landing na yung 50 or 75 [Central banks are inclined to cut rates gradually. It would be (in increments of) 25-25 (bps). If they will deliver a 50 (bps) cut, this means something big happened. A rate cut of 50 or 75 is for a hard landing].”

Should this happen, the BSP would be cutting its policy rates ahead of the United States Federal Reserve which is expected to deliver its rate cuts starting in September.

Remolona said, however, that this will not significantly affect the Philippine peso. He said the one that is being monitored is not the policy rate but the forward guidance of the BSP.

Rates kept

On Thursday, the BSP decided to maintain key policy rates even as it expects inflation to slow and the economy to remain resilient.

The Monetary Board maintained the BSP’s Target Reverse Repurchase (RRP) rate at 6.5 percent. This is the fifth consecutive meeting that the Monetary Board decided to maintain the RRP.

However, BSP Governor Eli M. Remolona Jr. said in a briefing on Thursday that with a less hawkish stance, the Monetary Board is now considering a rate cut as early as August and a Reserve Requirement rate cut “goes into the agenda” once monetary policy rates ease.

“We are actually somewhat less hawkish than before, which means we could ease, cut rates Q3 or Q4 this year, so the second half of this year,” Remolona said. He added that it was possible for the BSP to cut rates by August this year.

The interest rates on the overnight deposit and lending facilities also remained at 6 percent and 7 percent, respectively.

The BSP’s latest forecast showed that its risk-adjusted inflation forecast for the year eased to 3.8 percent from the initial estimate of 4 percent in the previous meeting.

The risk-adjusted inflation forecast for next year, however, rose to 3.7 percent from 3.5 percent as indicated in the previous meeting of the Monetary Board.

BSP Deputy Governor Francisco Dakila Jr. said adjustments were also made on the baseline forecast for this year and next year.

The BSP now expects baseline inflation to average 3.5 percent for 2024 from the initial 3.8 percent while the projection for 2025 was increased to 3.3 percent from the previous 3.2-percent estimate.

“As the governor mentioned, it’s mostly also because of base effects. And actually, if you were to look at the factors behind the April inflation number, more than half of that is attributable to just one commodity, rice. Its not really a broad- based inflation number,” Dakila said.

“As for the upward division in the baseline forecast for 2025, we’re looking at higher crude oil prices in this forecast round. Also, nonfuel prices. And as you very well know, the peso is trading at a slightly weaker band,” he explained.

In terms of economic growth, the BSP expects the full-year growth target of 6 to 7 percent this year to remain intact despite the slowdown in household final consumption expenditure (HFCE) slowdown in the first three months of 2024.

Dakila said the expected slowdown in inflation would prop up domestic consumption, which has long been regarded as the backbone of Philippine GDP.

He noted that while inflation will remain elevated and could still breach the 2 to 4 percent target of the BSP between May and July this year, the uptick will be temporary and will not be a threat to consumption spending and growth.

“Based on the latest GDP data, the expected path for domestic output growth over the medium term remains largely intact, even as recent indicators point to continued moderation under tight financial conditions,” Remolona said in a statement.

“The Monetary Board deems it appropriate to ensure sufficiently tight monetary policy settings until inflation settles firmly within the target range,” he added.

For his part, Rizal Commercial Bank Corporation Chief Economist Michael L. Ricafort said the BSP decision was “widely expected by the market.”

However, Ricafort said the BSP’s pronouncement on the earliest cut in rates certainly signaled a “less hawkish” BSP as this is at least one quarter earlier than what was initially expected.

“Further local policy rate pause or cut [especially in 2024] could already be possible for the coming months, as fundamentally supported by the easing inflation trend as seen recently amid higher base/denominator effects; also as a function of future Fed rate pause or cut/s [especially later in 2024]; also as a function of the behavior of the peso exchange rate, going forward,” Ricafort said.

Oxford Economics

United Kingdom-based Oxford Economics said if inflation cools, it shares BSP’s optimism that rate cuts would be possible by August this year.

If a cut is indeed delivered, the think tank said this would mean the BSP will cut rates ahead of the United States Federal Reserve.

“Such a scenario is not impossible if domestic inflation remains under control but it risks both higher imported inflation down the road and capital flight, especially in times of high geopolitical tensions,” Oxford Economics said.

“CPI [Consumer Price Index] data for the next three months and the second quarter GDP outcome which will be known by the August meeting will determine possible policy tweaks by the BSP,” it added.

With consumption hurting the country’s recent economic performance, analysts said the Bangko Sentral ng Pilipinas (BSP) is expected to start cutting rates as early as the third quarter.

In its latest Country Risk & Industry Research, BMI, a unit of Fitch Solutions, projects a rate cut by the Monetary Board in July when the United States Federal Reserve is also expected to cut rates.

Last week, the Philippine Statistics Authority (PSA) reported that the country’s GDP growth averaged 5.7 percent, slower than the 6.4 percent in the first quarter but faster than the 5.5 percent posted in the last quarter of 2023. (See: https://businessmirror.com.ph/2024/05/10/spending-cutbacks-to-continue-say-experts/)

High interest rates, BMI noted, caused a decline in investments in the first three months of the year. The tight monetary policy made borrowing costs soar. It said, however, that the El Niño is expected to affect food production, pushing commodity prices up and delaying any disinflation. (See: https://businessmirror.com.ph/2024/05/13/bsp-likely-to-start-cutting-rates-in-q3-analysts-project/).