Citing a weaker growth outlook amid infrastructure spending issues stemming from the misuse of public funds, especially on “ghost” flood control projects, the Bangko Sentral ng Pilipinas (BSP) on Thursday, Oct. 9, decided to reduce the key interest rate by 25 basis points (bps) to 4.75 percent from five percent previously.

This brought the trimmed rate back to the same level as September 2022, which was its lowest before a series of rate hikes to a peak of 6.5 percent was delivered.

BSP Governor Eli M. Remolona Jr. said in a statement that the central bank’s outlook for consumer price movement remains “benign and well within the target range” of two to four percent.

This outlook has shifted from the earlier forecast of the BSP that headline inflation will average below two percent by end-2025.

“Potential electricity rate adjustments and possible increases in tariffs on rice imports could add some upward pressures. Nonetheless, the risks to the inflation outlook are limited as price pressures are expected to ease,” the BSP said.

Additionally, the policy-setting Monetary Board (MB) noted that the outlook for domestic output expansion has “weakened.”

“This outlook reflects in part the impact on business confidence of governance concerns about public infrastructure spending,” it further said, adding that signs of easing demand also “reflect lingering uncertainty from the external environment.”

Likewise, the central bank also reduced the overnight deposit rate to 4.25 percent from 4.5 percent previously, and the lending rate to 5.25 percent from 5.5 percent.

To date, the MB has slashed the key interest rate by a total of 1.75 percentage points (ppts) from 6.5 percent before the easing cycle began in August last year.

For this year alone, the BSP has reduced the key interest rate by 100 bps across four consecutive policy meetings in April, June, August, and October.

“On balance, the MB sees scope for a more accommodative monetary policy stance,” the BSP said, a slight shift from the central bank’s less dovish stance previously.

Against the backdrop of a “favorable inflation outlook and moderating domestic demand,” the BSP said this “provides room to further support economic activity.”

“As the impact of earlier policy action works through the economy, the BSP will remain attentive to emerging risks while maintaining price stability conducive to sustainable growth and employment,” it said.

Capital Economics senior Asia economist Gareth Leather said the BSP’s “relatively dovish tone... suggests that more easing is likely. We expect at least one additional 25-bp cut before the current cycle ends.”

Leather said the next interest rate cut would be “most likely early next year.”

“Looking ahead, the economy could use more support. While GDP [gross domestic product] growth has held up reasonably well so far this year, it faces headwinds from tighter fiscal policy and weaker exports,” Leather said. First-half economic growth averaged 5.45 percent, slightly below the government’s 5.5- to 6.5-percent target range for the year.

Leather noted that the BSP itself “sounded downbeat” about the growth outlook, adding that “the ongoing fallout from the corruption scandal could further weigh on activity.”

For Leather, “the other reason we expect further easing is that inflation remains subdued,” citing that even the six-month-high headline inflation of 1.7 percent in September marked the seventh consecutive month that the annual rate of increase in prices of basic goods and services stayed below the BSP’s target band of manageable price hikes.