Bangko Sentral still iffy on rate cut

TAGAYTAY CITY — The Bangko Sentral ng Pilipinas (BSP) has an ambiguous stance when it comes to trimming interest rates as early as the first semester of 2024, saying inflation—albeit going down— remains a concern.

“I don’t know. It depends on the data as we always say, but it’s looking good. We like the trend so far. I would say it’s possible, but maybe not likely,” BSP Governor Eli Remolona Jr. told reporters in a forum over the weekend.

In December last year, Remolona signaled that the central bank is unlikely to cut rates in the next few months as the Philippines is “still not out of the woods when it comes to inflation.”

Inflation, which measures the rate of increase in prices for consumer goods and services, continued its downtrend for the third straight month in December 2023 at 3.9% —the slowest print for 2023 and also the lowest since February 2022 when it clocked in at 3%.

Despite the data showing inflation on a downward path, the BSP chief said supply shocks are still a risk, especially with the El Niño phenomenon.

“So, we’re not out of the woods. We don’t see a smoke in the gun,” Remolona said.

The BSP’s target reverse repurchase rate (at 6.5%), the overnight deposit rate (at 6.0%), and the overnight lending facility rate (at 7.0%) are at its highest levels in 16 years since it delivered an off-cycle rate hike in October 2023, snapping a six-month policy tightening pause following an aggressive tightening cycle which began in May 2022 to temper rising inflation.

Monetary policy or interest rates are among the tools used by central banks to stabilize inflation through controlling money supply by raising borrowing costs.

For example, the BSP sets the overnight reverse repurchase rate or the key policy rate, under which the central bank borrows from banks to maintain price stability. This, in turn, impacts the country’s money supply as it shifts money from banks into the central bank.

Tighter money supply could make consumers and businesses spend less, therefore reducing economic activity or lowering demand and eventually lowering prices.

Inflation outlook

For the entire 2024, Remolona said inflation is seen to settle within 4% to 4.2%.

“Not quite within rage but close to being within target,” he said.

The Marcos administration maintains a target ceiling of 2% to 4% for inflation rate.

“But supply shocks may derail that forecast including what’s going on with rice, the imports of rice. El Niño is a factor. So it depends on those risks,” Remolona said.

“We began to realize the supply shocks are very important for the inflation outlook, not because of the shocks themselves as we expect them to dissipate, but because of the second round effects from those shocks. They affect expectations and those expectations affect second round effects which we see in prices of services for example, in wages, transport fares,” he added.

Reserve requirement

While interest rates remain unlikely to be slashed, Remolona made a firm stance when it comes to banks and financial institutions’ reserve requirement ratio (RRR).

“Within the year, it’s very possible… [but] it depends on the data as usual,” the BSP chief said when asked if an RRR cut is likely this year,

The reserve requirement is the amount of cash a bank must hold in its reserves against deposits made by customers in the Philippines.

The last time the BSP slashed the RRR was in June 2023 when it cut the reserve requirement ratio by 250 basis points to 9.5%. — BM, GMA Integrated News