BSP chief sees room for 2 more rate cuts this year

The Bangko Sentral ng Pilipinas (BSP) signaled the possibility of two more rate cuts this year, its top official said, with a rate cut on the table as early as June.

“Maybe two more cuts. Not necessarily consecutive. Still 25-basis points (bps) at a time, given what we know about what’s going on,” BSP Governor Eli M. Remolona, Jr. told reporters at a press chat on Friday.

“The hard part is we don’t know. It’s new territory for most central banks. That’s the most uncomfortable part,” he added.

The Monetary Board in April reduced benchmark interest rates by 25 bps to bring the policy rate to 5.5%.

The central bank has so far slashed borrowing costs by a total of 100 bps since it began its easing cycle in August last year.

Mr. Remolona said a rate cut is still on the table at the Monetary Board’s next policy meeting on June 19.

“So far, the hard data says we have plenty of room to cut inflation, especially because inflation is low,” he added.

Headline inflation in April slowed to an over five-year low of 1.4%, bringing the four-month average to 2%.

Accounting for risks, the BSP expects inflation to average 2.3% this year.

“But we still have to be careful because we don’t want to cut too much. If we cut to the point where our demand exceeds our capacity, then that will be inflationary,” he said.

The central bank will likely continue delivering rate cuts in “baby steps” or increments of 25 bps.

“There’s room for more baby steps,” Mr. Remolona added.

There are four remaining Monetary Board policy meetings this year scheduled in June, August, October and December.

“But in the meantime, we’re trying to strengthen the transmission mechanism. So a rate cut may be more effective, somewhat more effective than before,” he added.

The BSP is also working on updating its frameworks and models to better price in global uncertainties.

“We’re very uncomfortable with our usual analysis, our usual models…because that framework was designed for a different environment.”

“What we’re doing now is we’re thinking harder about various scenarios, because our monetary policy will be affected somewhat by those scenarios,” he added.

US credit rating

Meanwhile, the BSP chief said they are considering trimming their holdings of US Treasuries to mitigate their exposure to the US amid the recent credit rating downgrade.

“We’re looking at it. The US is now just double ‘A’. It’s one thing when other countries’ debt is downgraded. But the US Treasuries down? That’s a big thing,” Mr. Remolona said.

Moody’s Ratings last week cut the US’ long-term issuer and senior unsecured ratings to “Aa1” from “Aaa,” revising its outlook to “stable” from “negative.”

It said the downgrade “reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”

The move stripped the US of its last triple-A rating from the big three credit raters.
In 2011, S&P Global Ratings cut the US’ sovereign long-term credit rating to “AA+” from its top investment grade of “AAA.” Fitch Ratings in 2023 also downgraded the country’s rating to “AA+” from “AAA.”

“But it’s still the most liquid market. The dollar is still the number one currency in terms of international lending and borrowing and in terms of investment,” Mr. Remolona said.

“So it’s likely to remain a very important part of our reserves,” he added. – Luisa Maria Jacinta C. Jocson, Senior Reporter