Tighter-than-necessary rate environment on BSP’s radar

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is beginning to see a tighter-than-necessary monetary policy environment, which may call the need to lower interest rates in the second half even if it cuts ahead of the US Federal Reserve.

In an interview with Bloomberg TV, BSP Governor Eli Remolona Jr. said the economy is still reeling from the effects of the Monetary Board’s last 25-basis-point rate hike in October 2023.

“The rate hike in October is still having an effect. We’re beginning to see a negative output gap, that means it’s possible we’re beginning to be tighter than necessary for taming inflation,” he said.

The BSP chief also noted that the policy transmission mechanism has long lags and that usually, the effects peak a year after the rate adjustment.

“We don’t want to unnecessarily reduce output just to tame inflation. It’s a balancing act,” he said, adding that while inflation is the main factor for its policy decisions, the Monetary Board will also consider risks to output growth.

“We want to minimize any loss in output,” Remolona said.

The BSP’s Monetary Board has kept borrowing costs steady for a fifth straight meeting on Thursday, keeping the target reverse repurchase rate unchanged at 6.50 percent, the highest in 17 years.

The overnight deposit rate and the overnight lending rate were also unchanged at six percent and seven percent, respectively.

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

Following the BSP’s policy briefing on Thursday, Remolona told reporters that he is looking at two possible rate cuts this year, both by 25 basis points. It is unlikely that the BSP would cut rates by 50 basis points in one meeting, as there is little probability of a marked economic slowdown.

He also said the BSP will likely cut borrowing costs ahead of the US Federal Reserve, which he expects to start policy easing by September. This will not put any significant pressure on the peso.

He pointed out that he is not worried about the depreciation pressures to the peso if the BSP cuts ahead of the US Fed.

“It’s been a strong dollar all along, broadly strong dollar for the past several weeks. We don’t feel obliged to intervene but we want to keep the market orderly,” he said.

Remolona said the Philippine central bank is comfortable with the current foreign exchange buffer.

The country’s gross international reserves slipped by 0.7 percent to $103.4 billion in end-April from $104.1 billion in end-March.

“We are happy at the movement of the peso. If there’s stress we might come in, we might intervene,” he said.

The peso has been above the P57 to a $1 level for one month, or since it breached the level on April 16. The local currency closed at P57.62 on Friday, up by 15.5 centavos from its previous finish.

Meanwhile, Remolona said inflation might peak in May, possibly breaching the two to four percent target this month before it decelerates and settles within the target range again for the rest of the year.

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