Recto sees 150 bps rate cuts in 2 years

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may cut interest rates by as much as 150 basis points in the next two years mainly due to the downtrend in inflation, according to Finance Secretary Ralph Recto.

Speaking at the Philippine Economic Briefing yesterday, Recto said it is “very much” possible for the Monetary Board to start cutting borrowing costs in the third quarter this year.

“It’s possible that we may have a rate cut this year and possibly more rate cuts next year. Surely I don’t expect interest rates to go any higher,” he said. “Maybe 150 basis points in the next two years.”

However, the outlook would still largely depend on the inflation path and the future policy moves of the US Federal Reserve.

“The spreads between the US and the Philippines should not be too different or else you might have (capital) flight to safety,” he said.

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. Year to date, inflation averaged 3.4 percent from January to April this year, still within the BSP’s two to four percent target range.

The Monetary Board hiked policy rates by 450 basis points from May 2022 to October 2023. This has brought the key rate to 6.50 percent, the highest in 17 years.

If inflation remains manageable, BSP Senior Assistant Governor Illuminada Sicat said the central bank could bring down interest rates.

“Based on our business model, we see that inflation will be within the target range,” she said.

“By bringing down interest rates, we can spur economic productivity and increase employment activity,” she added.

However, the BSP remains cautious of upside risks to the inflation outlook as inflation may breach the two to four percent target from May to July, but will return to the target in the second half.

“That is precisely the reason why the BSP has been very careful not to bring down interest rates too early, or else we may not be able to address some of the upside risks that we are seeing in the future,” she said.

Still, Sicat is confident that with all the monetary measures done by the BSP, together with the non-monetary measures of the national government in addressing supply shocks, inflation will remain within the target for the next two years.

Meanwhile, IMF resident representative Ragnar Gudmundsson said the BSP’s next policy decisions should be data-dependent and driven by domestic price conditions.

“The inflation trends are encouraging. However, I think we need to be aware that there are still upside risks to the inflation outlook,” he said.

Gudmundsson said these upside risks stem from geopolitical tensions, higher commodity prices internationally and some demands for higher wages.

“The BSP should probably maintain a sufficiently restrictive monetary policy stance until we are really firmly within the BSP’s target band,” he added.