Interest rates stay at highest in 17 years

BSP makes no adjustment for 6th straight meeting

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) kept its key policy rates untouched for the sixth straight meeting, but risks to inflation have now shifted to the downside, providing the central bank room to “more likely” ease in August.

In a press conference, BSP Governor Eli Remolona Jr. said the Monetary Board decided to keep the target reverse repurchase rate at 6.5 percent, the overnight deposit rate at six percent and the overnight lending rate at seven percent.

The country’s benchmark policy rates remain the highest in over 17 years, after the BSP kicked off its aggressive rate-hiking campaign from May 2022 to October 2023.

“The balance of risks to the inflation outlook has shifted to the downside for 2024 and 2025 due largely to the impact of lower import tariffs on rice under Executive Order 62,” Remolona said.

“Nonetheless, higher prices of food items other than rice, transport charges and electricity rates continue to pose upside risks to inflation.”

The BSP slashed its risk-adjusted inflation forecast to 3.1 percent for 2024 from 3.8 percent previously, and 3.1 percent for 2025 from 3.7 percent.

At the same time, the BSP lowered its baseline inflation forecast for the next two years. It now sees inflation averaging 3.3 percent this year from 3.5 percent and 3.1 percent in 2025 from 3.3 percent.

The risk-adjusted inflation is equivalent to baseline inflation forecasts plus the probability weighted impact of the different upside and downside risks to inflation outlook.

Inflation picked up to a six-month high of 3.9 percent in May, bringing the five-month average to 3.5 percent, still within the BSP’s two to four percent target.

Remolona said price pressures are expected to ease further in the second half, giving the Monetary Board room to cut rates by 25 basis points in the third quarter and another 25 basis points in the fourth quarter.

If realized, a total of 50-basis-point cut will bring the key rate down to six percent by end-2024.

“If sustained, an improvement in the inflation outlook would allow more scope to consider a less restrictive monetary policy stance,” Remolona said.

Inflation expectations have also remained anchored, while prospects for domestic output growth remain in line with medium-term trends amid favorable labor market conditions and strong net exports.

“However, uncertainty in the external environment calls for some caution against potential spillovers, including those in the financial markets,” Remolona said.

The Monetary Board will next meet on Aug. 15 to discuss policy.