The Bangko Sentral ng Pilipinas (BSP) on Thursday kept its policy rate unchanged, although Governor Eli Remolona Jr. said a rate cut in August was now “somewhat more likely than before” as price pressures are expected to soften in the coming months.
The Monetary Board (MB), the highest policymaking body of the BSP, left the benchmark rate unchanged at 6.5 percent for the sixth straight meeting.
READ: BSP keeps rates unchanged as expected
The decision to leave the target reverse repurchase rate at an over 17-year high was widely expected by analysts, including the nine economists polled by the Inquirer last week.
The outcome of the meeting took into account the latest government data that showed inflation quickened to 3.9 percent in May from 3.8 percent in the previous month on the back of higher utility costs. While the latest reading almost breached the central bank’s 2- to 4-percent target range, last month’s price gains were not as bad as many analysts had expected.
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Moving forward, Remolona told a press conference that the government’s decision to further slash the tariffs on rice—which is estimated to cut the domestic prices of the staple grain by P6 to P7 per kilo—could ease the overall price pressures in the second half of the year.
More dovish
For that reason, the BSP is now “somewhat more dovish than before,” Remolona said, adding that the central bank may reduce the key rate by a total of 50 basis points this year—with the first cut possibly in August, notwithstanding the timing of rate reductions by the US Federal Reserve.
Such a shift in tone was striking in the MB’s statement after the policy meeting, which now stressed that “an improvement in the inflation outlook would allow more scope to consider a less restrictive monetary policy stance.” It’s a dovishness that defied a weak peso that has moved ever closer to the record-low 59.
“In terms of monthly inflation numbers, it could breach in May or June, but just briefly, then it comes back to within the target range in July,” the BSP chief said.
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Banks use the BSP’s benchmark rate as a guide when charging interest rates on loans. By making borrowing costs expensive, the BSP wants to avoid too much money chasing too few goods. This, in effect, tames inflation.
The dovishness of the BSP also came as data showed that economic growth is starting to weaken amid tight financial conditions. The local economy grew 5.7 percent year-on-year in the first quarter, faster than the revised 5.5-percent expansion in the fourth quarter of 2023 but short of the Marcos administration’s 6- to 7-percent target.
Aris Dacanay, economist at HSBC Research, said there’s a chance that the BSP would cut ahead of the Fed, which would be a “tricky endeavor that requires precision and luck.”
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“The governor said so himself by saying that ‘some caution’ will be needed when it comes to how the external economy and financial markets will react if the policy rate were to be cut,” Dacanay said. “Timing will be key to ensure that the rate cut wouldn’t lead to too much volatility in the peso.”
