The Philippine central bank, Bangko Sentral ng Pilipinas (BSP), lowered its benchmark interest rate by 25 basis points to 5.75% on Thursday, marking the third consecutive rate cut. This move aligns with market expectations and signals potential for further easing in 2025, while acknowledging growing global economic risks.
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Governor Eli Remolona, speaking at a briefing in Manila, indicated that the central bank anticipates further reductions in borrowing costs next year, potentially at the next policy meeting. However, he clarified that previous suggestions of a 100 basis-point reduction in 2025 might be excessive, emphasizing a data-driven approach to future decisions. The decision to cut rates comes as inflation has remained within the BSP’s target range of 2%-4% for the past four months. This sustained period of controlled inflation, coupled with slower economic growth in the last quarter, provided justification for the BSP to ease monetary policy.
Declining Inflation and Economic Growth Support Rate Cuts
Capital Economics, in a research note, affirmed that the significant drop in inflation over the past year has allowed the central bank to continue its easing cycle, predicting further cuts in the coming months. The BSP’s move follows similar actions by central banks in Indonesia and Thailand, which also held rates steady this week but cautioned about increasing global uncertainties.
Global Risks and the Fed’s Influence
Following the BSP’s announcement, the Philippine peso weakened to a record low against the US dollar, closing at 59. Regional stock markets also experienced declines, influenced by the Federal Reserve’s recent decision to implement a third consecutive rate cut while signaling fewer reductions in 2025. While acknowledging the Fed’s influence, Governor Remolona stressed that the BSP prioritizes domestic economic data when making policy decisions. He emphasized that the central bank considers US data and Fed policy only to the extent that they impact Philippine inflation and growth.
Balancing Inflation Concerns and Peso Weakness
The BSP’s monetary policy statement echoed concerns voiced by other emerging market central banks regarding external risks, particularly geopolitical factors. The statement highlighted the central bank’s commitment to monitoring potential upside risks to inflation, including geopolitical tensions, potential adjustments to transport fares and electricity rates, and the impact of lower import tariffs on rice. Bloomberg Economics’ Tamara Mast Henderson suggests that while further rate cuts are likely, a 100 basis-point reduction as previously indicated is less probable. She notes that the BSP has also signaled the possibility of pausing rate cuts if inflation surges or the peso weakens significantly, potentially destabilizing price expectations.
Conclusion: A Cautious Approach to Monetary Easing
The Philippine central bank’s decision to cut interest rates reflects a cautious approach to monetary easing, balancing the need to support economic growth with concerns about inflation and global economic uncertainty. The BSP’s data-driven approach and willingness to adjust policy based on evolving economic conditions underscore its commitment to maintaining price stability and promoting sustainable economic growth. The central bank will continue to monitor domestic and international developments closely, adapting its policy stance as needed to navigate the challenges and opportunities presented by the global economic landscape.
