BSP Cuts Policy Rates by 25 Basis Points

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) has reduced policy rates by 25 basis points, marking the first cut in nearly four years and the first adjustment since the off-cycle hike in October 2023.

Key Rate Adjustments

• Target Reverse Repurchase (RRP) Rate: Reduced to 6.2%
• Overnight Deposit Rate: Adjusted to 5.75%
• Overnight Lending Facility Rate: Set at 6.75%

This is the first rate cut since the 25-basis point reduction in November 2020.

Inflation and Economic Outlook

BSP Governor Eli Remolona Jr. explained that the risks to the inflation outlook lean towards the downside for 2024 and 2025, with a modest tilt to the upside for 2026. He cited lower import tariffs on rice as a downside risk, while higher electricity rates and external factors could pose upside risks.

The central bank increased its risk-adjusted inflation forecast for 2024 to 3.3% from the 3.1% outlook in June. Inflation reached a nine-month high of 4.4% in July.

“With inflation on a target-consistent path, the current macroeconomic outlook supports a calibrated shift to a less restrictive monetary policy stance,” Remolona stated. However, he noted that monetary authorities remain mindful of lingering upside risks to prices.

Economic Growth and Future Rate Cuts

The Philippine economy grew by 6.3% in the second quarter, its strongest performance in five quarters, driven by strong consumption activities. Despite this, Remolona expressed more confidence in the deceleration of inflation than in the acceleration of GDP growth.

The BSP also revised its risk-adjusted inflation forecast for 2025 to 2.9% from 3.1% and announced a 3.3% forecast for 2026. For 2024, inflation is expected to average 3.4%, higher than the previous outlook of 3.3%, with projections of 3.1% in 2025 and 3.2% in 2026.

Remolona hinted at the possibility of another 25-basis point cut later in 2024, potentially during the next meetings on October 17 or December 19.

Analyst Perspectives

Capital Economics senior Asia economist Gareth Leather predicts inflation will fall back within the 3.0% to 4.0% target range in August and expects a 25-basis point cut in the BSP’s two remaining meetings of the year.

Metropolitan Bank & Trust Company (Metrobank) chief economist Nicholas Mapa also anticipates two more cuts this year, emphasizing the need to support growth momentum following modest consumption and soft private investment in the second quarter.

Conclusion

The BSP’s measured approach aims to ensure price stability conducive to balanced and sustainable economic growth and employment. The recent rate cut reflects the central bank’s efforts to navigate the evolving economic landscape.