The Bangko Sentral ng Pilipinas’ (BSP) Monetary Board on Thursday slashed its overnight borrowing rate by 25 basis points to 6.25 percent, signaling its shift from monetary tightening cycle which started in 2022.
BSP Governor and Monetary Board chairman Eli Remolona Jr. said while the 25-basis-point reduction would not have an immediate impact because of the lag between the BSP policy and banks’ actual interest rates, it would help support economic activity in 2025 by making the lending rates lower and credit easier.
This would help drive consumption and investments in the Philippines next year, he said. Banks’ interest rates remain elevated, discouraging households from taking out loans to buy homes, cars and big items. The high interest rates also deter companies from funding their expansion plans.
“By the way, the most relevant policy horizon for us is actually 2025,” Remolona said. “Because there are long lags in the transmission mechanism, what we made today will mainly affect 2025.”
The interest rates on the overnight deposit and lending facilities were also reduced to 5.75 percent and 6.75 percent, respectively.
The BSP announced the rate cut while projecting that the headline inflation trend would move downward to within the government’s 2 percent to 4 percent target range despite the uptick in July.
The BSP also reported the adjusted inflation forecasts for 2024 and 2025 which now stand at 3.3 percent and 2.9 percent, respectively. Meanwhile, the risk-adjusted forecast for 2026 is 3.3 percent.
It said the outlook is supported by well-anchored inflation expectations over the policy horizon.
Asked if the rate cut decision might be premature after inflation climbed to 4.4 percent in July, Remolona said it was entirely expected by the BSP’s calculation.
Remolona said the balance of risks to the inflation outlook continues to lean toward the downside for 2024 and 2025 with a modest tilt to the upside for 2026.
The BSP said the downside risks are linked mainly to lower import tariff on rice, while upside risks may come from higher electricity rates and external factors.
Remolona said that based on his personal view, another rate cut of 25 bps might happen later this year.
“My view have been consistent with the 25-basis-point cut today, and another 25 basis points sometime during the year, either in October or December. And then, we’ll see what happens in 2025,” Remolona said.
Remolona said the BSP was also trying to avoid upcycle decision. “We avoid upcycle decisions as much as we can. Upcycle decisions are either you think you fell behind the curve or you’re facing a hard landing,” he said.
The BSP said inflation is on a target-consistent path, with current macroeconomic outlook supporting a calibrated shift to a less restrictive monetary policy stance.
It said monetary authorities remain mindful of lingering upside risks to prices.
“Going forward, the Monetary Board will continue to take a measured approach in ensuring price stability conducive to balanced and sustainable growth of the economy and employment,” the BSP said.
