The Philippines has taken a significant step by cutting interest rates for the first time in nearly four years, signaling a potential trend towards further reductions as policymakers aim to sustain economic growth momentum. The Bangko Sentral ng Pilipinas (BSP) lowered the target rate by 25 basis points to 6.25% on Thursday, aligning with the expectations of 13 out of 23 economists surveyed by Bloomberg. The remaining analysts had forecasted no change in rates.
Citing the downside risks to inflation, the central bank indicated its support for continued easing measures. Following a series of tightening moves totaling 450 basis points to combat post-pandemic inflation, Governor Eli Remolona emphasized the possibility of additional rate cuts.
Governor Remolona, who had previously hinted at a potential 50 basis point reduction this year, suggested that the central bank could implement another 0.25% rate cut either in October or December.
The recent rate adjustment positions the BSP as one of the first central banks in Southeast Asia to shift towards easing policies, driven by diminishing pressure on the currency and consumer prices. The reduction in borrowing costs is expected to boost consumption in an economy that has been exhibiting rapid growth compared to its regional peers.
Despite robust GDP growth, signs of strain in domestic demand have surfaced due to the impact of high interest rates. Private consumption, a key driver of economic activity, experienced a slowdown in the post-pandemic period, with a contraction in the recent quarter.
Governor Remolona highlighted the rationale behind the easing measures, emphasizing the central bank’s confidence in inflation moderating, outweighing concerns about GDP growth.
Although inflation accelerated in July to its highest rate in nine months, the BSP anticipates a cooling trend for the remainder of the year, largely attributed to reduced import tariffs on rice.
In response to the rate cut, the peso has strengthened by over 2% against the dollar this month, contributing to a stable price outlook. However, the currency experienced a slight dip against the dollar immediately following the rate reduction.
The move is expected to be followed by further adjustments, with Bloomberg Economics forecasting potential rate changes in the coming months based on inflation trends and economic performance.
