Philippines – BSP: Rate cut possible if inflation slows to 2-4%

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may consider a rate cut if inflation returns to within the two to four percent target range for the fourth quarter of this year. Amid the inflation downtrend and possible return within the inflation target toward the end of the year, BSP Governor Eli Remolona told reporters Wednesday evening that the Monetary Board could considering reversing its tightening cycle by cutting interest rates.

“Of course, we’ll consider it. The Monetary Board will consider it,” Remolona replied when asked if the BSP would consider cutting rates once inflation eases to within the target range.

However, Remolona pointed out that other factors to be considered include output growth and the policy moves by the US Federal Reserve.

“Output growth, we’ll look at what the FOMC (Federal Open Market Committee) does because that’s data as well. We look at a lot of data,” Remolona added.

The next rate-setting meeting of the Monetary Board is scheduled on Aug. 17.

The inflation downtrend and the robust gross domestic product (GDP) growth in the first quarter of the year allowed the central bank to extend its prudent pause as it kept key policy rates untouched in the last two rate-setting meetings in May and June.

During its year-long tightening cycle to tame inflation and stabilize the peso, the BSP raised interest rates by a cumulative 425 basis points since it started its rate liftoff in May last year, making it the most aggressive central bank in the region.

This helped cool inflation to a 14-month low of 5.4 percent in June from 6.1 percent in May. But the consumer price index still averaged 7.2 percent in the first half of the year, way above the BSP’s two to four percent target range.

Likewise, the peso rebounded strongly to the 53 to $1 handle from an all-time low of 59 to $1 in October last year due to the aggressive rate hikes delivered by the BSP and its aggressive intervention in the foreign exchange market.

Remolona said the inflation downtrend gives monetary authorities more space to extend the pause in the coming rate-setting meetings, as it “somewhat supports the case to keep interest rates steady for some time.”

“Yes, the data suggest that. But you know the BSP is an inflation-targeting central bank. That means it is structurally hawkish when it comes to inflation,” he explained.

The US Fed has signaled more, but smaller rate hikes after pausing its tightening cycle last month.

“The FOMC is not an inflation-targeting committee, which means they do not put as large a weight on inflation as an inflation-targeting central bank of the Philippines,” Remolona said.

The BSP has four remaining rate-setting meetings scheduled between August and December this year.

“We do it one meeting at a time. But in doing it one meeting at a time, we also look forward at what we might do down the road. We’re not looking at just one policy rate. We’re looking at a path of the policy rate,” Remolona added.

Remolona’s predecessor, former BSP chief Felipe Medalla, earlier warned that it would be “very dangerous for the Philippine central bank to cut faster than the US even if its inflation is falling faster.”

For his part, BSP Deputy Governor Francisco Dakila Jr. said inflation is likely to fall below four percent as early as October after staying above the two to four percent target range since March 2022.

The Monetary Board last month slashed its inflation forecast to 5.4 percent from 5.5 percent for 2023, but raised next year’s projection to 2.9 percent from 2.8 percent.