Recto sees two rate cuts this year

The Bangko Sentral ng Pilipinas (BSP) may cut interest rates by 50 basis points (bps) this year, Finance Secretary Ralph G. Recto said.

“Possibly, 50 bps (this year). Maybe two (cuts). This is just my expectation,” he told reporters in mixed English and Filipino on the sidelines of an Economic Journalists Association of the Philippines event last week.

Mr. Recto, who sits on the Monetary Board, said the rate cuts this year will be “less than what we previously thought.”

“Last quarter last year, we were looking at four adjustments this year. Maybe it’s now just two,” he said.

However, he does not expect the easing cycle to begin at the Monetary Board’s next meeting on April 8.

“I don’t expect interest rates to go up or go down (next meeting). I might be wrong, but I don’t expect,” Mr. Recto said.

The central bank may end up reducing borrowing costs by up to 200 bps over the span of two and a half years, he added.

The Monetary Board kept its benchmark rate steady at a near 17-year high of 6.5% at its February meeting. The BSP had hiked borrowing costs by 450 bps from May 2022 to October 2023 to tame inflation.

The Finance chief also expects inflation to remain elevated.

“I think interest rates will be higher for longer because inflation will be higher for longer,” he said.

“Remember, you still have the disruption of the supply chain because of geopolitical tensions. There’s reshoring, onshoring, refiguring out the supply chains globally.”

Both Mr. Recto and BSP Governor Eli M. Remolona, Jr. expect inflation to quicken to 3.9% in March from 3.4% in February.

If realized, this would mark the second straight month of faster inflation. March inflation data will be released on April 5.

This year, the BSP expects inflation to average 3.6%, within its 2-4% target range.

Diwa C. Guinigundo, country analyst for the Philippines of GlobalSource Partners, said that an uptick in inflation could impact the BSP’s decisions moving forward.

“That could affect the BSP decision if the price pressures continue to build up and bring inflation forecasts uncomfortably close to the upper end of the target. If they ease under such conditions, inflation expectations might be de-anchored,” he said in a Viber message.

The BSP must continue to remain vigilant against risks that threaten to stoke inflation, Mr. Guinigundo said.

“What is more material to our local monetary authorities is the outlook for inflation for the next two years and any short-term risks that could substantially alter the inflation forecasts,” he said.   

“They must be monitoring any brewing supply shocks like the impending wage adjustments and transport fare increases that could trigger second-round effects and upset the market’s inflation expectations,” he added.

The central bank’s risk-adjusted inflation forecast for this year is at 3.9%.

Mr. Remolona earlier said that February inflation data showed that it is still too soon to declare victory over inflation, citing upside risks such as elevated food prices.

Mr. Guinigundo also noted the impact of the El Niño on the inflation outlook.

“El Niño must have been considered before but it looks like it’s getting more serious. So the market should look at the BSP’s risk-adjusted forecasts more carefully than its baseline forecasts,” he said. “Keeping the policy stance steady remains optimal while they are still sorting out the many balls in the air.”

The latest bulletin by the state weather bureau showed that the El Niño across the tropical Pacific Ocean shows signs of weakening and is expected to persist until May.

The BSP also earlier warned that the dry spell could impact agricultural output and stoke inflation in the second quarter.

An earlier study by BSP economists showed that El Niño Southern Oscillation events could increase headline and food inflation by 0.49 percentage point (ppt) and 0.69 ppt, respectively. — Luisa Maria Jacinta C. Jocson