BSP keeps rates on hold as expected

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) hit the pause button for the fifth straight policy meeting as it kept the benchmark interest rates steady yesterday, but it may start cutting borrowing costs as early as August if a sustained downtrend in inflation becomes fully evident.

At its third policy review of the year yesterday, the central bank’s Monetary Board decided to keep the target reverse repurchase rate unchanged at 6.50 percent, the overnight deposit rate at six percent and the overnight lending rate at seven percent.

“The Monetary Board deems it appropriate to ensure sufficiently tight monetary policy settings until inflation settles firmly within the target range,” BSP Governor Eli Remolona Jr. said in a press conference.

“A restrictive policy stance will also help keep inflation expectations anchored amid a possible buildup in upside risks to future inflation,” he said.

Remolona said latest projections indicate that the inflation outlook continues to lean toward the upside amid potential price pressures from higher transport charges, food prices, electricity rates and global oil prices.

The BSP lowered its risk-adjusted inflation forecast this year to 3.8 percent from four percent previously, but raised its projection for 2025 to 3.7 percent from 3.5 percent.

At the same time, the BSP lowered its baseline inflation forecast for 2024 to 3.5 percent from 3.8 percent previously. It also raised its estimate to 3.3 percent from 3.2 percent for next year.

The risk-adjusted inflation is equivalent to baseline inflation forecasts plus the probable weighted impact of the different upside and downside risks to inflation outlook.

BSP Deputy Governor Francisco Dakila Jr. said revisions to the forecasts for this year were due to the lower than expected inflation in April.

However, expectations of higher global crude oil prices and non-fuel prices as well as a weaker peso have prompted the BSP to hike its baseline inflation forecast for 2025.

Inflation averaged 3.4 percent from January to April this year, still within the BSP’s two to four percent target range. After easing significantly to 2.8 percent in January, inflation picked up pace to 3.4 percent in February, 3.7 percent in March and 3.8 percent in April.

Remolona said the Monetary Board is less hawkish than before due to the lower than expected inflation print in April. It may also begin its easing cycle as early as August this year or by the fourth quarter.

The central bank may also consider cutting banks’ reserve requirement ratios once the Monetary Board starts easing interest rates this year, the BSP chief said.

The BSP Monetary Board has raised key policy rates by 450 basis points from May 2022 to October 2023 to tame inflation and stabilize the peso.

Remolona said the country’s output growth over the medium term remains largely intact, even as recent indicators point to continued moderation under tight financial conditions.

Based on the latest data from the Philippine Statistics Authority, the Philippine economy expanded by 5.7 percent in the first quarter, faster than the 5.5 percent in the quarter earlier but slower than 6.4 percent a year ago. Still, it remained below the government’s six to seven percent target.