Policy Rate Cuts: What would Remolona do?

We are still slightly biased in favor of saying Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. will cut rates next week.

The recent string of data reports might suggest that the BSP will likely opt to keep rates unchanged next week after July inflation hit 4.4% and gross domestic product (GDP) growth settled at 6.3%.

On face value, cutting rates while inflation is above target and growth is robust would not be likely.

Forward looking vs data dependent

We believe, however, that Governor Remolona remains inclined to cut rates at the soonest, following his comments about “not waiting long” to ease. After carrying out an aggressive tightening cycle in the face of similar US Fed rate hikes and domestic inflation, as well as an “emergency” rate hike last October, it appears Remolona is pining to cut rates at the soonest opportunity.

This inclination explains how Remolona was open to cutting policy rates even ahead of the US Federal Reserve. If Remolona adopts a forward-looking approach to monetary policy, we could see the BSP follow through with a rate reduction as early as next week.

Only a matter of timing

With Remolona possibly pointing to a downward trend for inflation as early as August and to what National Economic and Development Authority (NEDA) Secretary Arsenio Balisacan described as “anemic consumption”, we believe the BSP can opt to cut policy rates to finally provide the economy a nice shot in the arm.

The projected easing could help reinvigorate investment outlays which have been dominated by government spending of late. If BSP opts to pause next week, we believe the rhetoric from both the BSP governor and finance secretary suggests that rate cuts may be carried via an “emergency” policy meeting, potentially once the August inflation is reported in early September.

What is becoming very clear is that the BSP will not want to wait until its October meeting to provide some relief to the economy, with the governor working the proper timing for doing so.

Our call: 25-basis-point reduction by the BSP at the August 15 meeting or via an emergency meeting on September 5.

NICHOLAS MAPA is Metrobank’s Chief Economist, Market Strategist, and Head of the Research and Market Strategy Department in the Financial Markets Sector. He graduated from the University of Asia and the Pacific (UA&P) with an undergraduate degree in Humanities and a Master of Science (MSc) in Industrial Economics. He also completed an MA in Economics from Vanderbilt University and an MBA from the Kelley School of Business at Indiana University. He travels regularly with his family, enamored by culture and history. An avid learner, he also reads extensively.