Huge Fed rate cut gives BSP room to follow suit

MANILA, Philippines —The Bangko Sentral ng Pilipinas (BSP) has more room to cut interest rates by 25 basis points at its meeting next month after the US Federal Reserve lowered its policy rates by half a percentage point.

Metrobank chief economist Nicholas Antonio Mapa said the interest rate differential between the Philippines and the US is now at 125 basis points, giving the BSP space to cut again next month.

“The BSP has more than enough space to cut the target reverse repurchase rate (RRP) by 25 basis points in October, with September inflation possibly dipping to 2.3 percent,” Mapa said in a social media post.

He added that the timing of cuts may also become an issue if the Monetary Board pauses next month, as the US Fed has two scheduled meetings before the BSP meets in December. The Fed will meet on Nov. 6 to 7 and on Dec. 17 to 18 to discuss policy.

The BSP slashed interest rates by 25 basis points in its meeting last month ahead of the US Fed’s cut. This brought the target RRP to 6.25 percent from the over 17-year high of 6.50 percent, marking the central bank’s first rate cut in nearly four years.

Before the cut, the BSP 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 to tame inflation.

BPI lead economist Jun Neri said the beginning of the US easing cycle opens the window to accumulate gross international reserves (GIR) as long as the Philippines has a comfortable interest rate differential with the US.

“The BSP can probably become as aggressive as the Fed in the cuts if our GIR is brought up closer to the Philippine economy’s $130-billion external debt. BSP hasn’t been able to build up its GIR significantly since the rate hike cycle in mid-2022,” he said.

Based on the latest central bank data, the country’s GIR level increased to $106.9 billion in August from $106.7 billion in July. It marked the highest in 29 months or since the $107.3 billion in March 2022.

Thus, the Monetary Board may deliver only one more rate cut this year as the Philippines needs to build up its dollar buffer first while it still has the space to do so, Neri said.

He added that the Monetary Board also needs to reduce banks’ reserve requirement ratios meaningfully this year.

BSP Governor Eli Remolona Jr. said the Monetary Board will “substantially” lower banks’ reserve requirements before the end of the year and further cuts in 2025.

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.