Two more interest rate cuts seen in 2025
After remaining below the target range for two months, inflation is seen likely to gain pace in the coming months, but will still leave room for key interest rate cuts by the Monetary Board of the Bangko Sentral ng Pilipinas (BSP).
“I think inflation will rise. Right now we’re below our target band. I think inflation will rise to within the target band,” BSP Governor Eli Remolona Jr., told reporters in a press chat before the weekend.
Inflation slowed further to 1.4 percent in April this year from 1.8 percent in March, dragged lower by falling rice prices and easing food inflation.
While inflation stayed below the government’s estimates and the 2 to 4 percent target band, the BSP sees this development in a positive light.
This should give the policy-setting Monetary Board “plenty of room to cut rates,” Remolona said.
The BSP governor’s statement “reflects a careful balancing act between sustaining growth and maintaining price stability,” John Paolo Rivera, a senior research fellow from Philippine Institute for Development Studies, said.
The return of inflation to the 2 percent to 4 percent target range “suggests that base effects may wear off and upside risks like
food supply pressures, utility adjustments, and global oil prices could reassert themselves in the coming months,” Rivera said in a message sent to this paper on Sunday.
Rate cut at next MB meeting
A private economist said a rate cut of 25 basis points (bps) could happen during the next rate-setting meeting by the Monetary Board on June 19.
Michael Ricafort, RCBC’s chief economist, told this paper in a separate message on Sunday, the Board may go ahead and cut the key rate “to prioritize and optimize monetary easing and spur faster economic growth and development.”
Ricafort also said it is possible for inflation to move closer to 2 percent by August this year, which would bring the full year 2025 inflation nearer the 2 percent low-end of the band on average, or “even possibly slightly below the BSP inflation target range of 2 percent to 4 percent.
“This could justify further BSP rate cuts that would match any future (US) Fed rate cuts from 2025-2027,” he added.
Non-monetary measures
Remolona said the non-monetary measures that the Marcos administration is putting in place should also help manage inflation.
These measures, the BSP said, refer to actions taken by the government to address economic issues, particularly inflation, without adjusting interest rates or the money supply.
They focus on improving supply and addressing other factors influencing prices, rather than directly manipulating monetary conditions.
“The thing with non-monetary measures is, we need them because they weaken the past interventionist rules,” Remolana said.
“For example, (rice) tariffication has been very helpful because it replaced quantity limits on imports,” he added.
No-decimal-point inflation
Remolona said they are “seriously thinking” of revising the reporting system for inflation by using a single absolute number, dropping the decimal points.
The government, though, is not yet aggressively pursuing this track, pending final discussions with the International Monetary Fund (IMF).
“We’re seriously thinking of just having a point, a level, a target level,” he said.
“Because the band kind of says if we’re at 3.9 percent, that’s just as good as 3 percent. And I don’t feel that way. Three percent is better than 3.9 percent,” Remolona added.
The central bank is positive that a single number will help communicate policies better.
“In the US, it’s just 2 percent. In many other central banks, it’s just a one number,” Remolona said, adding that it will probably be lower than the mid-point of the target band at 3 percent.
“Maybe a bit lower. The reason it’s not zero is because in a growing economy, you have to allow relative prices to change.
The BSP, Remolana said, considers 2 percent good enough but nothing is final so far because the central bank people are still crunching numbers and doing their homework.
Plenty of room to cut
Low inflation and other hard data have given the central bank plenty of room to cut rates, Remolona said.
During its Monetary Board meeting on April 10, the Monetary Board decided to cut its Target Reverse Repurchase Rate by 25 basis points to 5.5 percent, citing a more manageable inflation outlook.
Interest rates on overnight deposits were adjusted accordingly to 5 percent, and the lending facilities to 6 percent.
The Board has so far reduced the key rate by 100 bps since August last year.
“There’s room for more baby steps. A few baby steps. I think at least two more cuts. Not necessarily consecutive and still 25 bps at a time,” Remolona said.
PIDS’ Rivera said calibrated easing could help support domestic demand, lending, and investment activity “especially if inflation remains in check.”
There are four remaining policy meetings for this year–June, August, October and December.
“But in the meantime, we’re trying to strengthen the transmission mechanism. So, a rate cut may be more effective effective than before,” Remolona said.
The Philippine Statistics Authority is releasing May inflation data on June 5.
