The central bank’s Monetary Board cut the target reverse repurchase (RRP) rate by another 25 basis points (bps) to 5.75 percent on Thursday, Dec. 19, third time the RRP rate has been reduced since August.
Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said that while the BSP will maintain a measured approach to monetary policy easing in 2025, it is unlikely to reduce the policy rate by as much as 100 bps next year, as he previously signaled.
The BSP has already cut the interest rate by a cumulative 75 bps this year amid lower inflation.
“At this stage given our forecasts and our data, 100 bps may be a bit much,” Remolona told reporters during a press briefing after the policy meeting, the last for the year. “I think we will maintain an easing posture, but maybe not to the extent of cutting by 100 bps. We have to see what the data say.”
With a more controlled inflation outlook, Remolona said he is not worried about the weaker peso against the US dollar and its effect on price pressures.
“We don’t have a target level for the exchange rate. We do have some assumptions that help us with the budget (but) we are concerned about the pass-through,” he said.
He explained that the pass-through effect of the peso on inflation “tends to become important when there’s a depreciation.”
“There’s a threshold and we’re still trying to refine our estimates on that threshhold but on some point, if the peso keeps depreciating it begins to have an effect on inflation. For now the effect has been modest. It hasn’t been a big factor in our discussions,” Remolona said.
Meanwhile, BSP Assistant Governor Zeno R. Abenoja announced revisions to the inflation forecasts for 2025 and 2026.
The new risk-adjusted inflation forecasts are 3.4 percent for 2025 and 3.7 percent for 2026. The 2025 forecast is higher than the October estimate of 3.3 percent, while the 2026 projection is unchanged.
The BSP’s 2024 inflation forecast is now 3.2 percent, up from the previous 3.1 percent estimate.
Remolona hinted that even with the cumulative 75 bps rate reduction this year, it is not enough to have an immediate impact on the country’s growth trajectory.
“Even with 75 bps, all our estimates (showed that) we’re still somewhat on the tight side, and that, for us, is a kind of insurance,” he said. “The reason we’re cutting in baby steps is because we’re not absolutely sure about inflation. We’re still worried that inflation might start to rise again.”
While the 2024 and 2025 risk-adjusted forecasts are in the mid-range of the two percent to four percent government inflation target, the 3.7 percent forecast for 2026 is on the high side.
Still, Remolona said the BSP sees inflation settling within the target range over the policy horizon, with inflation expectations that are well-anchored.
He reiterated that the balance of risks to the inflation outlook remains on the upside because of impending transport fare and electricity rate hikes. On the downside, the impact of lower import tariffs on rice is a major factor.
Remolona said domestic demand remains “firm but subdued.”
“Private domestic spending is expected to be supported by easing inflation and improving labor market conditions. However, downside risks in the external environment could materialize and temper economic activity and market sentiment,” he noted.
He added that “on balance, the within-target inflation outlook and well-anchored inflation expectations continue to support the BSP’s shift toward less restrictive monetary policy. Nonetheless, the monetary authority will continue to closely monitor the emerging upside risks to inflation, notably geopolitical factors.”
The Monetary Board also cut the overnight deposit rate to 5.25 percent, and the lending facilities have a reduced rate of 6.25 percent.