Downward interest rates and bank reserves would bolster loans to productive economic sectors in the Philippines, according to the World Bank.
"Along with lower inflation, the reductions in the real interest rate and lower reserve requirements could spur demand for credit in the near term by improving business and consumer sentiment," the Washington-based multilateral lender said in its Philippines Monthly Economic Developments report for September 2024 published on Oct. 2.
The World Bank was referring to the monetary policy easing cycle that the Bangko Sentral ng Pilipinas (BSP) jump-started in August by cutting the key interest rate by 25 basis points (bps) to 6.25 percent.
On top of expectations of more rate cuts, the BSP also ordered a reduction in banks' reserve requirement ratio (RRR) — currently among the highest in the region — taking effect this month.
"The BSP estimates the full impact of these policy adjustments will be felt with a lag of 12-15 months," the World Bank noted.
Policy easing would likely sustain accelerated bank lending to both consumers and industries since end-2022 and end-2023, respectively, the World Bank said.
The Philippine peso and the stock market also strengthened after the US Federal Reserve's aggressive rate cut last month, which the World Bank said "made assets in emerging economies more attractive to international investors and enhanced capital inflows," hence hiked foreign investors' net purchases of local shares.
"Peso appreciation, driven by a wider US interest rate differential, supports domestic disinflation. This gives more room for further normalization of domestic monetary policy," the World Bank said.
The lender cited recent statements from Governor Eli M. Remolona Jr. hinting at two BSP rate reductions of 25 bps each when the Monetary Board tackles the policy stance on Oct. 16 and Dec. 19.
It helps that headline inflation is "on track to fall within target this year," the World Bank said. The BSP projected annual price hikes to average 3.4 percent by yearend and 3.1 percent next year, within the targeted two- to four-percent range deemed conducive to economic growth.
"The balance of risks to the [inflation] outlook has shifted toward the downside given expected reductions in rice prices as more imports arrive under the reduced tariff regime," the World Bank said, although "upside risks remain in the form of higher transport charges and electricity rates, and possible global oil and food price shocks."
"Domestic rice production and prices also remain vulnerable with the La Niña weather phenomenon expected to bring more rainfall and intense typhoons in the remaining months of the year," the World Bank added.