‘More room to stay tight,’ BSP says

The Bangko Sentral ng Pilipinas (BSP) on Tuesday said there is “more room to stay tight” after better-than-expected gross domestic product (GDP) growth in the second quarter.

“The 6.3% (GDP growth)… there’s more room to stay tight, right? But there are many factors,” BSP Governor Eli M. Remolona, Jr. told reporters on the sidelines of a Development Budget Coordination Committee briefing at the Senate.

“It’s not like the United States, their economy is weaker. They’re more inclined to ease. That’s just one number. We will look at all (the numbers),” he said in mixed English and Filipino.

The Philippine economy expanded by 6.3% in the second quarter, faster than 5.8% in the previous quarter and 4.3% a year ago. This was also the fastest growth in five quarters or since 6.4% in the first quarter of 2023.

“We look at all the components. Our models take into account different components of GDP,” Mr. Remolona added.

The BSP chief said the latest GDP performance “helps” the case for keeping rates steady as the risk of a hard landing is lessened.

“In the US, the risk for a hard landing is higher, but I also now see less of a hard landing in the US,” he added.

The Monetary Board is set to meet on Thursday for its third-to-the-last policy review for the year.

A BusinessWorld poll conducted last week showed that nine of 16 analysts surveyed expect the Monetary Board to deliver a 25-basis-point (bp) rate cut this week.

During the hearing, Mr. Remolona told senators the 6.5% benchmark rate is “tight.”

“It’s tight because we are trying to tame inflation… the direction is to of course eventually ease monetary policy, which means lower policy rate. So, we intend to ease when the conditions are right… when we feel inflation has been tamed.”

Mr. Remolona said the BSP does not want to keep rates high for an “unnecessarily” long time because this could lead to loss of output.

“As soon as we feel inflation is on the way to our target range, we will have room to ease the policy rate,” he added.

Headline inflation accelerated to 4.4% in July, the fastest in nine months. It also ended seven straight months of inflation settling within the central bank’s 2-4% target.

The BSP earlier said the spike in July inflation is temporary, and that inflation should return to target from August onwards.

For the rest of the year and until 2025, inflation should ease further and settle within target, Mr. Remolona said.

“We are relieved that monetary policy has evidently helped to tame inflation. This is reflected in our inflation projections… We expect average inflation to fall within our target range of 2-4% in 2024 and 2025,” he said.

The BSP expects inflation to average 3.3% this year and 3.1% in 2025. For the first seven months, headline inflation averaged 3.7%.

“We used to think we could ignore supply shocks because they would eventually dissipate. The hard lesson is large supply shocks change inflation expectations, which lead to inflationary second-round effects,” Mr. Remolona added.

Finance Secretary Ralph G. Recto, who is also a Monetary Board member, said he expects policy easing to begin soon.

“As far as my expectations are concerned, I think policy rates are going to be on the way down,” he said.

“It may be tomorrow, it may be in September, it could be in October, but I think for the next two quarters I could safely predict that we could probably reduce rates by 25 to 50 bps. I foresee in the next year and a half, we could reduce by another 100 bps by next year.” – Luisa Maria Jacinta C. Jocson, Reporter