Philippines: BSP chops rates for the first time in nearly four years in August
Latest bank decision: At its meeting on 15 August, the Monetary Board of Bangko Sentral Pilipinas (BSP) decided to lower the target reverse repurchase (RRP) rate by 25 basis points to 6.25%. The overnight deposit and lending facilities rates were also adjusted down by 25 basis points to 5.75% and 6.75%, respectively. The cut followed six consecutive holds, marked the start of BSP’s monetary policy loosening cycle, and was broadly in line with market expectations.
Monetary policy drivers: The decision to pivot was primarily driven by lower prospects for inflation, which is projected to align with the government’s target range of 2.0–4.0% in 2024–2026, tied down by well-anchored inflation expectations. In addition, risks to inflation are skewed to the downside in 2024 and 2025 thanks to lower import tariffs on rice. Moreover, the Bank was upbeat about the economic outlook due to solid Q2 GDP growth, easing price pressures, a decline in the unemployment rate through June, and an expected boost ahead from public investment.
Policy outlook: The Monetary Board did not provide specific forward guidance on future interest rate movements but indicated that it “will continue to take a measured approach in ensuring price stability conducive to balanced and sustainable growth of the economy and employment”. In comments to the press following the decision, Governor Remolona stated rates could be reduced by a further 25 basis points in October or December. Our Consensus is for about 50 basis points of additional cuts by year-end. Weaker-than-expected domestic demand poses a downside risk.
The next meeting is scheduled for 17 October.
Panelist insight: ING analyst Robert Carnell commented on the outlook:
“This is not likely to be a one-and-done rate cut. Philippine inflation is likely to slow substantially in the months ahead as rice prices at worst stay elevated but fail to deliver a further boost to inflation as last year’s price increases drop out of the year-on-year comparison. […] We could see BSP tracking the Fed one-for-one in the coming months as the Fed finally begins its own easing cycle – depending on how the PHP behaves. And further easing looks probable in 2025. This easing could sow the seeds for a more robust growth outlook in 2025.”
Nomura analysts Euben Paracuelles and Nabila Amani echoed this view:
“As evident in today’s decision, the next moves by BSP will largely be driven by the inflation outlook – if inflation continues on a downward path, BSP can look to further remove the restrictiveness in the monetary stance to support a recovery in domestic demand and overall growth. Moreover, we continue think the Fed turning dovish will play a role, and its easing cycle underway from September, as our US team expects, should support further BSP’s consecutive rate cuts in the coming months.”