Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. has signaled more strongly that the BSP is not going to wait any longer and may cut the policy rate on Aug. 15 after the government reported a lower inflation rate for the month of June of 3.7 percent versus 3.9 percent in May.
In an economic forum on Monday, July 8, Remolona also reiterated that they will not wait for the US Federal Reserve to start reducing its own rates and is comfortable about cutting ahead of the Federal Open Market Committee (FOMC) because of the moderating domestic inflation path which may or may not have peaked already.
“When I said that we have to be cautious or we have to be careful, that basically means we have to not wait too long for easing because the longer we wait for easing the more likely it is that we will cause a loss of output which we don’t want,” he told members of the Economic Journalists Association of the Philippines (EJAP) Monday in an open forum. The EJAP Economic Forum is co-hosted by San Miguel Corp.
He further said that “there’s a bit more scope for easing, possibly in August.”
Remolona said the US Fed and its actions is “not the most important data among the numbers that we look at.” Besides the inflation outlook, they look more closely at the exchange rate currently nearing P59 vis-à-vis the US dollar since it affects inflation. The BSP also carefully monitors the data on the output gap because this could affect the timing of when to cut the policy rate.
He said the output gap, which is the difference between the country’s output and capacity is “what we call the natural rate of interest, which is the interest rate that balances supply and demand for the Philippines.”
Remolona said rice prices have been driving up inflation since August last year. Before that, in 2022 it was oil prices and then it shifted to food prices.
“This is why we think the non-monetary measures that the government has put in place, especially EO 62, are so helpful, because that will help us get to where we want to go, which is stable prices. By stable prices, we mean inflation is somewhere between two and four percent,” he said.
Meanwhile, the BSP chief said changes in the exchange rate since the beginning of the year is as expected. Fluctuating currencies versus the US dollar are occurring across the region and the globe. The peso for one has weakened against the US dollar, but so have most other currencies.
“The strength of the dollar has been because the dollar has become the single most important safe haven currency. Whenever you have tensions around the world, the dollar is stronger. In fact, even if the uncertainty is in the US, it makes the dollar stronger. Of course, in recent months, it has been about the messaging from the FOMC, from the Fed. The Fed as been saying it's going to be higher for longer. And that has weakened all the other currencies against the dollar,” said Remolona.
However, when the US dollar is stronger or the peso depreciates, it affects local inflation because imports are mostly invoiced in US dollar. Still, Remolona has said before that the effect of the depreciation of the peso on inflation has become weaker.
Despite the weaker pass through, the BSP still worries about the peso when it depreciates too sharply. “We don’t want too much volatility in the peso. We want the peso to move based on fundamentals. When there’s too much volatility, it’s bad for trade. It’s bad for both imports and exports. So we want to make the movement of the peso smoother,” said Remolona.
When asked if the BSP is still looking at a 50 basis points total rate cut for 2024, Remolona said that is still possible. However, he opted to be on the cautious side when signalling what is in store for 2025 as far as rate cuts are concerned.
“Give us time to work on the (policy rate cut) numbers,” he said.
The BSP’s Monetary Board kept its target reverse repurchase (RRP) or key rate unchanged at 6.5 percent during its June 27 policy meeting amid the shifting balance of risks to inflation which is now more on the downside for 2024.
For this year, the BSP has revised the inflation forecast lower compared to the last policy meeting. The central bank now has a 3.1 percent risk-adjusted inflation forecast from the previous estimate of 3.8 percent for 2024. For 2025, they also see a 3.1 percent risk-adjusted inflation forecast versus its previous 3.7 percent projection.