BSP delivers surprise 0.25 ppt rate cut
The Bangko Sentral ng Pilipinas yet again reduced its key policy rate by 0.25 percentage point to 4.75 percent, as concerns about infrastructure-related corruption made a dent in economic growth.
“The outlook for growth has softened in the near term,” BSP Governor Eli Remolona Jr. said in a press briefing.
“Governance concerns on public infrastructure spending have weighed on business sentiment,” Remolona said.
Many Filipinos have latched on to this issue, following developments at Congressional hearings with a growing list of private contractors and politicians allegedly involved in questionable projects. The controversy has prompted many to join protest actions last month.
The BSP chief said that growth was turning out to be weaker than policymakers had thought. The government had assumed that gross domestic product (GDP) would increase by 6 percent annually. But growth turned out to be lower, especially in 2024.
Remolona noted that the Philippine stock market has been declining recently and fewer companies were expanding their operations, reflecting dampened business sentiment.
Also, Remolona said growth was weaker because demand is weaker. This, in turn, is why inflation is low.
The increase in consumer prices registered at 1.7 percent year-on-year in September. This was the seventh straight month that inflation printed below the BSP’s target range of 2 percent to 4 percent.
Also, inflation averaged at 1.7 percent from January to September.
Remolona earlier said that at 5 percent, the benchmark interest rate was at the “Goldilocks” level. This means it is “just right,” neither too high nor too low.
On Thursday, he said that the “sweet spot has moved.”
“We’re still refining our estimates. We had thought that our Goldilocks policy rate was closer to 5 percent, now it’s closer to 4 percent. So we have to decide where we really are between 5 percent and 4 percent,” Remolona said.
The implication is that “we have more wiggle room than before,” he added.
The BSP’s latest move comes as a surprise, as an Inquirer Business poll of 16 analysts showed that 10 of them expected the BSP to keep the policy rate unchanged.
The latest decision follows three consecutive policy-setting meetings when the key rate was lowered by a quarter of a percentage point each time. These meetings were held in April, June and August.
“We thought incorrectly in hindsight that the [BSP] would be willing to wait until December—that is, until after third-quarter GDP confirmed said economic weakness—to cut to 4.75 percent, given the Governor’s more neutral tone at the previous meeting,” Miguel Chanco said in a commentary.
Chanco is chief economist for Emerging Asia at United Kingdom-based Pantheon Macroeconomics.
“And we also thought that this would be the terminal rate,” he said. “Our core view now is that the [Monetary] Board will cut again at the next meeting, to a terminal level of 4.5 percent, given its decidedly more dovish October statement.”
Remolona said concerns about governance were a big factor in the relative weakness of the economy. “We’re hoping that this is short-lived.”
