BSP key rate seen at 5% by mid-2025

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) could deliver two more 25-basis-point rate cuts this year and 75 basis points worth of easing in early 2025 as inflation is likely to remain within target until 2026, according to Metropolitan Bank & Trust Co. (Metrobank).

In a report, Metrobank chief economist Nicholas Mapa said this would bring the target reverse repurchase rate down to five percent from the current 6.25 percent. But the outlook will still depend on growth and inflation conditions for the next two years.

“If inflation remains well-behaved, the US Fed proceeds with three rate cuts and growth remains constrained, we could see the BSP cutting rates by another 50 basis points before the end of the year,” Mapa said.

He said the central bank has scope to ease given the latest economic growth data.

“Given the BSP’s forecasts pointing to inflation remaining within target all the way through to 2026, we believe that the BSP has the price stability objective in hand for the moment,” he added.

In a move to shift to a less restrictive monetary policy, the BSP cut borrowing costs by 25 basis points last week. This was the central bank’s first rate cut in almost four years, the last being in November 2020.

Prior to this, the BSP had kept its policy rate steady for six straight meetings since November 2023. From May 2022 to October 2023, it hiked rates by 450 basis points.

Mapa said the BSP was keen to cut rates because, as earlier signaled by BSP Governor Eli Remolona Jr., the economy is likely in need of some relief from “tight” monetary policy.

“The move suggests that rates are not at ‘normal’ levels and that the restrictive stance would impose a toll on economic growth if kept at elevated levels for much longer,” Mapa said.

“Tight policy rates may have been imperative when inflation was well above the target, but with inflation on the downtrend, it appeared that tight policy was no longer the right prescription for a growing economy,” he said.

Meanwhile, easing inflation will also give the BSP room to resume its reserve requirement reduction. This will be the central bank’s operational adjustment to align with market best practices for liquidity management.

Since reducing banks’ reserve requirement ratios (RRR) is not a policy move, Mapa said these adjustments may be carried out at regular Monetary Board meetings.

“Reductions to the RRR should result in even more excess liquidity, but unless we see policy rates lowered further, we may have to get used to industry growth rates for productive lending and single-digit growth levels for a little longer,” he said.

The RRR is the percentage of bank deposits and deposit substitute liabilities that banks cannot lend out and must set aside in deposits with the BSP.

In June 2023, the BSP slashed the RRR for big banks as well as non-bank financial institutions with quasi-banking functions by 250 basis points to 9.5 percent from 12 percent previously.

Likewise, the RRR for digital banks was reduced by 200 basis points to six percent from eight percent, followed by mid-sized or thrift banks by 100 basis points to two percent from three percent.

The level of deposits small banks are required to keep with the BSP was also lowered by 100 basis points to one percent from two percent.