BSP Holds Policy Rate at 6.5% Amid Economic Optimism

The Bangko Sentral ng Pilipinas (BSP) has decided to maintain its policy rate at 6.5%, a move reflecting cautious optimism in the face of easing inflation and a recovering economy. This decision comes after the BSP’s aggressive monetary tightening cycle that started in May 2022, which saw a total increase in borrowing costs by 450 basis points. The recent policy meeting was the first since an off-cycle rate hike of 25 basis points on October 26, which brought the policy rate to its highest since mid-2007.

Despite the pause in rate hikes, BSP Deputy Governor Francisco G. Dakila, Jr. emphasized the need for continued tight monetary policy settings until a sustained downtrend in inflation is evident and inflation expectations are firmly anchored. This stance aligns with the Monetary Board’s commitment to ensuring price stability.

The decision was influenced by October’s inflation rate, which slowed to 4.9% from 6.1% in September, marking the slowest pace in three months. However, inflation has consistently breached the 2-4% target for 19 straight months, with a 10-month average of 6.4%. BSP Governor Eli M. Remolona, Jr. acknowledged that while the Philippines isn’t “out of the woods” yet regarding inflation, the country is close to its target range.

The BSP also revised its inflation forecasts, lowering the risk-adjusted forecast for 2023 to 6.1%, and making adjustments for 2024 and 2025 as well. However, the balance of risks to the inflation outlook leans towards the upside, influenced by factors such as higher transport charges, electricity rates, and international oil prices.

Economic growth in the Philippines showed signs of strength, with GDP expanding by 5.9% in the July-to-September period, although still below the government’s 6-7% full-year target. The BSP’s decision to hold rates is also influenced by the peso’s performance and the broader global economic situation. According to HSBC ASEAN economist Aris Dacanay, the peso’s stability and a slower-than-expected inflation rate in October reduced the urgency for a rate hike.

Looking ahead, experts anticipate that inflation may rise in early 2024 before stabilizing within the target range later in the year. This forecast suggests that the BSP may refrain from further rate cuts until the second half of 2024, aligning its policies with the easing cycle of the Federal Reserve to support the peso and manage imported inflation.

In summary, the BSP’s decision to maintain its policy rate reflects a strategic balance between fostering economic growth and controlling inflation, demonstrating cautious optimism in the face of uncertain global economic conditions​​.