Recto expects BSP to match Fed rate reduction

The Bangko Sentral ng Pilipinas (BSP) is considering the possibility of matching last week's significant interest rate cut by the US Federal Reserve, as inflation continues to slow in the Philippines. Finance Secretary Ralph Recto expressed confidence on Tuesday that the BSP could implement a similar 50 basis point reduction, following a recent easing cycle initiated by the central bank.

"I think we can also do half a percent," Recto stated while addressing reporters at the Malacañang Palace. His remarks come in light of the BSP's decision last month to lower the benchmark interest rate by 25 basis points to 6.25 percent, marking the beginning of a cycle aimed at stimulating economic growth.

The Federal Reserve, in a bold move last Wednesday, reduced its policy rate by 50 basis points, bringing it down to a range of 4.75-5.0 percent. The Fed also signaled the possibility of another 50 basis point cut before the end of the year, reflecting a shift towards a more accommodating monetary policy amid slowing inflation in the United States.

BSP Governor Eli Remolona Jr. previously indicated that the central bank has room for another 25 basis point cut in the fourth quarter. However, the trajectory of these decisions may be influenced by the actions taken by the Federal Reserve. The BSP's Monetary Board has two policy meetings scheduled for October and December, where further rate cuts could be deliberated.

Recto emphasized the positive implications of lowering interest rates on the country's economic prospects. He noted that achieving the government's growth target of 6.0 to 6.5 percent for the year would be more attainable if interest rates were further reduced. "I expect the economy to grow by 6.1 percent, which will be aided by a deceleration in inflation," he remarked.

Forecasts suggest that consumer price growth could slow to approximately 2.5 percent this month and average 3.4 percent for 2024, aligning with the BSP's inflation target of 2.0 to 4.0 percent. "The beauty about reducing inflation is that your GDP (gross domestic product) growth goes up and more jobs can be created, and your borrowing cost goes down," Recto explained.

However, not all analysts share the same optimism regarding the economic outlook. Capital Economics predicts a modest GDP growth rate of just 5.1 percent for this year, attributing it to tighter fiscal policies and declining remittances. The firm anticipates that further easing of monetary policy will occur through the remainder of this year and into the first half of next year, potentially boosting consumption and economic growth.

HSBC Global Research economist Aris Dacanay stated that the BSP will remain "data-dependent" in its approach to monetary policy. While he acknowledged the recent cut in the reserve requirement ratio as a form of easing, he cautioned that it does not significantly alter the overall monetary policy outlook.

"The BSP only signaled one 25-basis point rate cut for the rest of 2024, showcasing that the BSP isn't in much of a rush to loosen the monetary reins," Dacanay remarked. However, he noted that last week’s actions by the Fed have heightened the likelihood of a 50 basis point cut by the BSP in the fourth quarter.