BSP Signals Possible Rate Cut in August Amid Slowing Inflation

(L-R) BSP Senior Assistant Governor Iluminada Sicat, BSP Governor Eli Remolona Jr., and BSP Deputy Governor Francisco Dakila Jr. (Jon Viktor Cabuenas/GMA Integrated News)

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) has decided to maintain policy rates for the fifth consecutive meeting. However, they hinted at the potential for a rate cut as early as August, driven by a downward revision in inflation expectations.

Current Policy Rates

During a briefing on Thursday, BSP Governor Eli Remolona Jr. announced that the Monetary Board held the target reverse repurchase (RRP) rate at 6.5%, the overnight deposit rate at 6.0%, and the overnight lending facility rate at 7.0%. These rates are the highest they have been in 17 years, since May 2007, when the benchmark rate was at 7.5%.

Revised Inflation Outlook

The decision to maintain current rates comes as the inflation outlook has been adjusted. The risk-adjusted inflation forecast for the year was revised downward to 3.8% from the previous 4.0% projection in April. This adjustment considers factors such as higher transport charges, food prices, electricity rates, and global oil prices.

Moreover, the baseline inflation forecast for the year has been updated to 3.5%, down from 3.8% projected during the previous policy meeting in April.

BSP’s Policy Stance

Governor Remolona emphasized the importance of maintaining a restrictive monetary policy until inflation stabilizes within the target range. “The Monetary Board deems it appropriate to ensure sufficiently tight monetary policy settings until inflation settles firmly within the target range. A restrictive policy stance will also help keep inflation expectations anchored amid a possible buildup in upside risks to future inflation,” he stated.

He also reiterated the Board’s support for the national government’s non-monetary measures aimed at addressing persistent supply-side pressures on food prices and preventing further secondary effects.

Recent Inflation Trends

Inflation in April was recorded at 3.8%, marking the third consecutive month of acceleration and bringing the first-quarter average to 3.3%. This compares to the 3.7% inflation rate in March and the 6.6% rate in April 2023. The April 2024 figure is the highest since December 2023, when inflation was 3.9%.

Future Rate Cut Possibilities

In the same briefing, Remolona indicated a shift towards a less aggressive monetary stance, hinting at the possibility of rate cuts in the latter half of the year. “We are actually somewhat less hawkish than before, which means we could ease or cut rates in the third quarter or fourth quarter of this year, so the second half of this year,” he said.

When asked specifically if a rate cut could occur at the next policy meeting scheduled for August 15, 2024, Remolona responded affirmatively, suggesting that a rate cut could indeed happen in August.

Inflation Projections for 2025

Looking ahead, the BSP has adjusted its inflation outlook for 2025. The baseline forecast was raised to 3.3% from 3.2%, and the risk-adjusted forecast was increased to 3.7% from 3.5%. These adjustments account for potential factors such as higher oil prices and peso depreciation.

Historical Rate Hikes

Since May 2022, the BSP has raised key policy rates by a total of 450 basis points to combat inflation, which averaged 6.0% in 2023, exceeding the target range of 2.0% to 4.0%.

Conclusion

The BSP’s decision to keep rates steady while hinting at potential cuts in August reflects a careful balancing act between controlling inflation and supporting economic growth. As inflation shows signs of easing, the central bank’s less hawkish stance could pave the way for lower interest rates, potentially providing relief to borrowers and stimulating economic activity.