BSP Considers August Rate Cut Amid Improved Inflation Outlook

The Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. hinted at a more dovish stance on Thursday, suggesting that a policy rate cut in August is “somewhat more likely than before.”

Potential Rate Cut and Current Rates

Governor Remolona indicated that the BSP might reduce rates by 50 basis points this year, as inflation is expected to decrease more than initially projected. Currently, the Monetary Board has maintained the target reverse repurchase (RRP) rate at 6.5% – the highest level since May 2007. The overnight deposit rate remains at 6.0%, and the overnight lending facility rate is steady at 7.0%.

Revised Inflation Forecasts

The inflation outlook for 2024 has been adjusted downward to 3.1% from the previous 3.8% projection in May. Similarly, the forecast for 2025 has been revised to 3.1%, down from 3.7%. The baseline forecast for 2024 is now 3.3%, compared to the earlier estimate of 3.5%, and for 2025, it has been lowered to 3.1% from 3.3%.

“The balance of risks to the inflation outlook has shifted for 2024 and 2025, largely due to the impact of lower import tariffs on rice under Executive Order 62,” Remolona stated during a briefing in Manila.

Policy and Inflation Drivers

Executive Order 62, signed by President Ferdinand “Bongbong” Marcos Jr., modifies the import duty rates on various commodities, including rice. This order is expected to reduce headline inflation by 12 basis points and ease inflation by 14.8 percentage points over 12 months.

“The Monetary Board anticipates further easing of price pressures in the second half of the year with the implementation of EO62 and Administrative Order 20. If this trend continues, it would provide more scope for a less restrictive monetary policy stance,” said Remolona.

However, he cautioned that rising prices of other food items, transport charges, and electricity rates could still pose upward risks to inflation.

Future Monetary Policy

Looking forward, the BSP is committed to ensuring that monetary policy settings align with its primary mandate of maintaining price stability conducive to sustainable economic growth.

Remolona mentioned that a rate cut is “somewhat more likely” in August, with a potential 25-basis point reduction in the third quarter, followed by another 25-basis point cut in the fourth quarter, totaling a 50-basis point reduction for 2024.

“I think the last time, I said we’re still hawkish but less so. We’re basically in the same position, somewhat more dovish than before,” Remolona noted.

In May, Remolona suggested the possibility of easing rates in August, reflecting a “less hawkish” stance based on economic growth data indicating a robust domestic output growth in the medium term.

Since May 2022, the central bank has increased key policy rates by 450 basis points to control inflation, which averaged 6.0% in 2023, above the target range of 2.0% to 4.0%.