BSP sees more room to keep rates high

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) sees more room to keep borrowing costs elevated following the faster-than-expected economic growth in the second quarter.

BSP Governor Eli Remolona Jr. said the gross domestic product (GDP) growth of 6.3 percent in the second quarter is “good” and helps keep key interest rates tight.

“There’s more room to stay tight because of (the second-quarter GDP growth),” he said. “However, it’s just one number. Some components of the GDP data are weak. We will look at all the components.”

He also said that the risk of a hard landing, or a rapid decline in economic growth, has lessened due to the second-quarter GDP data.

The Philippine economy expanded at a faster rate of 6.3 percent in the second quarter from the 4.3-percent growth in the same period last year and the revised 5.8-percent growth a quarter prior.

Growth averaged six percent in the first half, hitting the government’s six to seven percent target for this year.

The BSP has kept its benchmark rate steady for the last six meetings, after hiking borrowing costs by 450 basis points from May 2022 to October 2023. This brought the benchmark rate to a 17-year high of 6.50 percent from an all-time low of two percent.

During a budget hearing yesterday, Remolona told senators that monetary policy is considered tight with the key rate at 6.50 percent.

Monetary authorities maintain a tight monetary policy to reduce the demand for money and limit the pace of economic expansion, thereby taming inflation.

“It’s tight because we are trying to tame inflation. High interest rates means weaker demand and weaker demand means lower inflation,” he said.

“The direction is to of course eventually ease monetary policy, which means lowering the policy rate. So we intend to ease when the conditions are right, or in other words, when we feel inflation has been tamed,” Remolona said.

He added that the BSP does not want to keep borrowing costs high for an “unnecessarily long time to risk a loss of output.”

“So as soon as we feel inflation is on the way to our target range, we will have room to ease the policy rate,” Remolona said.

The Monetary Board is scheduled to have its fifth policy review on Thursday. While most economists expect the BSP to deliver its first 25-basis-point rate cut, some believe rates will be unchanged due to the strong second-quarter GDP growth and above-target July inflation.

Meanwhile, Finance Secretary and Monetary Board member Ralph Recto said he expects policy rates to go down this year.

“It may be on Thursday, it may be in September, it could be in October, but I think for the next two quarters I could safely predict that we could probably reduce rates by 25 to 50 basis points,” he said.

“I foresee in the next year and a half, we could reduce by another 100 basis points. I think inflation is on its way down,” Recto added.

After Thursday’s review, the Monetary Board will again meet on Nov. 16 and Dec. 14 to discuss policy.