The economy could face too much risk if monetary officials cut the key interest rate to below 5 percent from its current 5.75 percent during its next policy-setting meeting, so the central bank is seen more likely to reduce the rate by just 25 basis points (bps) next month, the chief economist of the Bank of the Philippine Islands (BPI) said on Wednesday.
In a zoom meeting with reporters yesterday, BPI chief economist Jun Neri said he expects the Bangko Sentral ng Pilipinas’ (BSP) policy-setting Monetary Board to reduce key rates by just 25 bps twice this year, or a total of 50 bps, and another 25 bps next year.
The key Reverse Repurchase (RRP) Rate currently stands at 5.75 percent.
Any rate reduction to below 5 percent could lead to misallocation of resources and less affordable asset prices, Neri said.
On the assumption that the US Federal Reserve will not make a huge announcement on its key rates when it meets on April 2, BPI sees the first 25 bps rate cut to happen when the Monetary Board meets on April 10.
The next 25 bps cut then should happen in the third quarter of the year, and another 25 bps in 2026. Then the BSP could take a long break before tweaking its policy rates, he said.
“So if we settle at, let’s say, 5.0 or 4.75 or 5.25, those are generally seen as healthy levels of policy rates,” Neri said.
Risk of drastic cuts
The misgiving of tweaking policy rates below the 4.5 percent could result in financial resources being misallocated or being invested too much in certain sectors of the economy such as condos and office buildings, as what happened during the three years to 2019, he said
There could be a big buildup in debt, leading to a proliferation of “zombies,” while financial inequality gets worse as assets become less affordable to the average Filipino, Neri said.
In financial terms, zombies are companies that earn just enough money to continue operating and service debt but are unable to pay off their debt. Zombie companies are barely able to meet overheads such as wages, rent, interest payments on debt, but have no excess capital to invest to spur growth, and are usually subject to higher borrowing costs.
If the country’s economic growth, as measured by gross domestic product, becomes too slow, that should be the best time for the BSP to make additional cuts to policy rates, Neri said.
The Monetary Board kept the Reverse Repurchase (RRP) Rate steady at 5.75 percent
during its last meeting early this year. At that time, the BSP cited global economic uncertainty and other trade risks.
Back then, BSP Governor and Monetary Board Chairman Eli Remolona said “uncertainty hovering over inflation and the economic growth outlook dictates keeping the status quo in the current monetary policy settings.”
This time, however, the peso-dollar exchange rate is closer to P57-$1, and inflation is closer to 2 percent with no earth-shaking developments from abroad, Neri said.
Near neutral level
Neri sees full-year inflation settling at 3.5 percent this year, within the government’s 2 percent to 4 percent target even if somewhat faster than 2024’s full-year average of 3.2 percent.
Monetary officials are getting close to the neutral rate for the BSP, which Remolona calls the “goldilocks rate” — not too high, not too low.
“Right now we’re at 5.75 and I think we’ve heard also from the BSP on their estimate about the neutral interest rate, nominal that is, which is close to 5 percent. So it looks like from where we are, they will probably end up cutting by as much as 50 to 75, but not necessarily all within this year,” Neri said.
On the other hand, the BSP is not making it ultra-cheap for borrowers to raise funds but they’re just making a lot of funds more readily available through the reserve requirement ratio cut.
Vibrant economy
Despite all the uncertainties abroad, the domestic economy remains relatively vibrant, and the Philippines has the potential to stand out among its regional peers because of strong household consumption, Neri said.
After the economy grew 5.6 percent in 2024, short of the government’s 6 percent to 6.5 percent growth target, BPI is bullish that the economy has the potential to grow by 6.3 percent this year. ~0~
