The Monetary Board, the policy-making arm of the Bangko Sentral ng Pilipinas (BSP), could consider reducing the target reverse repurchase (RRP) rate by 50 basis points (bps) this year and as much as 100 bps in 2025 but this will depend on the domestic economic growth performance, according to BSP Governor Eli M. Remolona Jr.
Remolona said to cut as much as 150 bps in two years would indicate there is a risk of a hard landing which means a shift from growth to slow growth. As such, he considers 150 bps as an aggressive policy rate reduction.
“Given the present trajectory (of growth), it could be too aggressive,” he said on Tuesday, June 4, during a Tuesday Club event in Mandaluyong, Metro Manila where he was the guest speaker.
It was the new Finance Secretary Ralph G. Recto who first announced to media that he is for a 150 bps rate cut. Recto is an ex-officio member of the Monetary Board.
Meanwhile, Remolona said it is still possible to implement a rate cut ahead of the US Federal Reserve. He has said last May 16 that the BSP may cut the RRP rate before the US, probably as early as August.
Based on the latest survey of external forecasters (BSEF) for May, economists anticipate that the BSP will likely retain the current 6.5 percent policy rate in the second quarter but will reduce the rate by 25 bps in the third quarter.
The BSP said the majority of the analysts expect policy settings to remain unchanged but “about the same number of respondents expect a 25-bp cut in the policy rate during the period.” There is only one monetary policy meeting in the third quarter which was in August.
By the end of 2024, economists see the BSP cutting the policy rate by 25 to 150 bps. This means they also expect the BSP to cut the key rate in October and December.
For 2025, economists think the central bank will further loosen its policy stance by a range of 25 to 250 bps. Analysts also expect an additional reduction of about 50 to 150 bps in the policy rate by 2026.
Generally, the BSP does not expect the country’s gross domestic product (GDP) will expand as much as the targeted six percent to seven percent growth this year and the 6.5 percent to 7.5 percent forecast for 2025 due to the high interest rate environment.
The BSP, in a report, said domestic GDP growth outlook remain intact over the medium term despite tight financial conditions but still, the economy in 2024 “could settle below the government’s target as higher global crude oil prices and positive real interest rates temper domestic demand.”
For 2025, GDP growth could be better as global prospects also improve. “Growth is seen to pick up in 2025 on stronger net exports amid an improving global growth outlook.”
However, based on the BSP’s May 2024 Monetary Policy Report (MPR), there are deflationary tensions that will affect growth. “The latest estimates of the output gap point to the economy operating slightly below potential, thus suggesting possible deflationary pressures going forward,” said the BSP. Deflation is the opposite of inflation, it is when consumer prices are reduced, resulting to higher purchasing power.
The BSP said the projected impact of the BSP’s policy rate adjustments is likely to peak in the second half this year. It also noted that higher global crude oil prices and positive real interest rates could also temper domestic demand.
The country’s GDP grew by 5.7 percent in the first quarter, below the government target of six percent to seven percent.