BSP signals potential rate cut to stimulate growth

1 month ago 9

BAGUIO CITY — Another policy rate cut could be possible at the next Monetary Board (MB) meeting as the Philippine economy grows below capacity, according to the central bank’s governor. 

During a media information session, Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. told reporters that a further cut is “on the table,” when asked whether the central bank is considering the move. 

Remolona said that the US Federal Reserve, which earlier signaled a more cautious reduction of the key borrowing costs, influences the succeeding decisions of the central bank.

“Of course it [US Federal Reserve’s moves] affects what we will do because it affects what happens to the economy, what happens to inflation rates,” Remolona. 

He clarified further that although it affects the next moves of the local authorities, the BSP does not merely copy it.

Locally, alongside other considerations, the BSP bases its decision on the country’s actual gross domestic product (GDP) relative to the output gap.

“Right now we have a kind of a negative output gap. We’re growing at a little bit below capacity,” Remolona noted, implying that the local economy is accelerating at a slower pace than it could.

In principle, if the actual GDP is below capacity, there is a negative output gap, which is usually disinflationary. In contrast, if it is above capacity, there is a positive output gap, potentially driving inflation up.

With the central bank considering another reduction in the key policy rate during its Feb. 13 MB meeting, the key interest rate for the first quarter of 2025 could settle at 5.50 percent, 25 basis points (bps) lower from the current 5.75 percent rate.

Ayala-led Bank of the Philippine Islands (BPI) stated that the weaker-than-expected GDP growth “has strengthened the case for a BSP rate cut” during the next MB meeting. 

“With inflation still within the target, the central bank may put more priority on growth and support the economy with more liquidity,” said Emilio S. Neri Jr., BPI senior vice president and lead economist.

However, Neri anticipates a 50 bps cut for 2025, citing the looming and existing risks that could limit the central bank’s pace in its policy easing cycle.  

Neri noted that the country’s large current account deficit keeps the peso sensitive to external factors, including US Federal Reserve policies and decisions under the Trump 2.0 administration. Thus, aggressive rate cuts by the BSP could add more pressure on the local currency.

Meanwhile, Capital Economics senior Asia economist Gareth Leather expects a faster easing this year, with 75 bps for the first three quarters. 

“With more accommodative monetary policy—we expect three 25 bps [basis points] rate cuts in the first three quarters—and likely well-contained inflation, consumer spending and investment are both likely to strengthen,” Leather said, projecting that the local economy will gain “some momentum” this year. 

“Nevertheless, uncertainty around US tariff policies, tighter than expected financial conditions, and rising geopolitical risks present some headwinds,” he noted. 

Read Entire Article