The Bangko Sental ng Pilipinas (BSP) said Wednesday it expects a gradual relaxation of monetary policy as inflation rate remains within the target range.
“With inflation now on a target-consistent path, we have room for a calibrated shift to a less restrictive monetary policy stance,” BSP Governor Eli Remolona said in an interview with Global Finance magazine.
The BSP’s Monetary Board slashed its overnight borrowing rate by 25 basis points to 6.25 percent on Aug. 15, 2024. The interest rates on the overnight deposit and lending facilities were also reduced to 5.75 percent and 6.75 percent, respectively.
“The cut in rates in August was driven by our projections of inflation and growth based on the latest data on domestic conditions. The timing of the FOMC’s actions did not play much of a role in our decision,” Remolona, who earned an “A–” grade in the magazine’s 2024 Central Banker Report Cards, said.
“In fact, about two months before our latest policy rate cut, our forward guidance already indicated that we expected to shift to a less hawkish monetary stance. I also mentioned during an economic forum in early July that the BSP did not need to wait for the US Fed to cut rates before we do,” he said.
Remolona said the rate cut in August came amid a favorable inflation outlook.
“A key factor to this is the recent Executive Order lowering the tariff on rice imports. Rice is the staple in Filipino households, and so changes in rice prices have considerable impact on overall inflation. In addition, core inflation has continued to ease, with a September reading of 1.9 percent,” Remolona said.
“The BSP’s latest estimates showed that even if some risks to inflation materialize, inflation will settle at 3.3 percent this year, 2.9 percent next year and 3.3 percent in 2026. These are all within the target range of 2 percent to 4 percent,” he said.
Remolona said the reaction of financial markets to the BSP easing its policy rate earlier than the US Fed was relatively muted, with the Philippine peso weakening only slightly versus the US dollar right after the recent policy decision and has since continued to appreciate.
“Previous policy rate increases had some dampening effect on demand, including credit activity. Nevertheless, the impact of tight financial conditions was something the domestic economy could absorb — as indicated by sustained GDP growth and improving employment conditions,” Remolona said.
“On the domestic interest rate path, the current macroeconomic outlook, including target-consistent inflation, supports a calibrated shift to a less restrictive monetary policy stance. However, the BSP will continue to monitor lingering upside risks to prices, including those coming from higher electricity rates and external factors,” he said.
Remolona also said that the outlook for domestic economic growth over the medium term is largely intact.
“With 6.3 percent growth in the second quarter, it would likely settle within the government’s target in 2024 as a whole. We expect growth to be supported by robust construction spending and the timely implementation of various government programs,” he said.
