go through Katherine K. Chen
Bangkok Sentral NG Pilipinas (BSP) on Thursday lowered its key policy interest rate for its third consecutive meeting and said another cut this year could be the last cut in this monetary easing cycle.
The Monetary Commission lowered its target reverse repurchase rate by 25 basis points (BP), from 5.25% to 5%, as expected by 20 analysts BusinessWorld Last week’s poll. This is also the lowest level in the past three years or since November 2022.
Interest rates for overnight deposit and loan facilities were also reduced by 25 basis points, to 4.5% and 5.5%, respectively.
Central banks have so far reduced borrowing costs by 125 basis points since their slow cycle began last August. It held two AUD 2.5 billion in its last two meetings in April and June.
“Based on the latest data, I think this makes us the best place for inflation and output,” Gov. Eli M. Remolona, Jr. said in the briefing.
Inflation fell to a six-year low in July, down to 0.9%, and in the first seven months, the average inflation rate increased to 1.7%.
The Philippines economy grew 5.5% in the second quarter, hitting a 5.4% rate from 5.4% in the first quarter, but slower than the 6.5% growth in the second quarter of 2024. In the first half of the year, GDP grew by 5.4%, down from the government’s 5.5% to 6.5% growth target this year.
“We hope that the expected inflation rate for the next year or so is what we hope for. Output is shifting to what we think we can,” Remolona said. “The policy rate itself is our ‘Goldilocks’ rate – neither too high nor too low.”
“I describe it as still fit, but in terms of forward guidance, it’s much less than before…we have to look at a lot of scenarios because there’s still a lot of uncertainty.”
BSP expects inflation to average 1.7% this year, higher than the June forecast of 1.6%. Its inflation forecast for 2026 is 3.3% from the previous 3.4%. For 2027, inflation is expected to rise from the previous 3.3% to 3.4%.
Mr Remorona said that despite reaching the “best position”, there is other room for lowering tax rates this year. “The data can be changed. The best points can be moved.”
“I think we still have room for cuts. If the data develops the way we think it will be cuts this year,” said the BSP head. “This is a possible development of policy rates. Of course, if the output indicates something bad happened to the output lacking demand, then we cut more.”
“Overall, we think the outlook for inflation is very manageable and inflation expectations are good, but we still see the risk of the outlook for inflation is greater than the outlook for output,” Remorona said.
The Monetary Commission held two policy meetings this year in October and December.
In a statement, the BSP pointed out that potential electricity adjustments and rice tariffs could “increase inflationary pressures within the policy scope.”
Despite firm domestic demand, recent U.S. trade policy could undercut global growth.
“The impact of U.S. policy on global trade and investment continues to weigh global economic activity. This could ease the prospects for the Philippines economy,” BSP said.
U.S. President Donald J. Trump has subverted global trade by unilaterally raising tariffs on all of his trading partners. The U.S. tariffs on Filipino goods reached 19%, the same as those in four other Southeast Asian countries.
“Emerging risks will continue to require close monitoring. The Monetary Commission will determine the response of monetary policy based on the evolving outlook for inflation and growth,” BSP said.
Meanwhile, Mr Remorona said the possibility of lowered interest rates by the U.S. Federal Reserve “does not worry them too much.”
“As you know, we used to worry that our policy rate was within 100 basis points of the Fed’s policy rate,” he said. “If this spread is narrowed to less than 100 basis points, the peso could depreciate. We don’t see it anymore, and it doesn’t seem to happen anymore.”
Mr Remolona said that PESO has been appreciating the dollar even though the difference between BSP and the Fed’s current target rate of 4.25%-4.4.5% has been below 100 bps for some time.
Gareth Leather, senior Asian economist at Capital Economics, said the BSP’s “relatively dirty tone” suggests that it may be further alleviated.
“We expect to cut at least $2.5 billion a year,” he said.
Mr Leather said the Philippines economy may need more support as growth may slow down in the second half of the year.
“Low inflation and lower interest rates will provide some support for demand this year. However, as fiscal policy tightens, exports will weaken, and we expect growth to struggle,” he said.
“However, the main reason we expect further relaxation is the very weak price pressure,” he added.
Metrobank chief economist Nicholas Antonio T. Mapa said the BSP will depend on the data, “as inflation behaves, there is potential additional relief in the pipeline, and inflation expectations are anchored.”
Sunny Liu, chief economist at Oxford Economics, said they expect the central bank to lower tax rates in the fourth quarter.
“We expect inflationary pressures to remain hurt given higher commodity prices. While recent PESO weaknesses may raise concerns about domestic price passes, the expected Fed rate may alleviate some depreciation pressure in September. We continue to expect BSP to maintain its easing bias, while 25 bp is expected, with another 25 bp cut in the fourth quarter.
