BSP chief: 150-basis points rate cut might be ‘too aggressive’

Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. said on Tuesday that a reduction of the BSP policy rate by 150 basis points until next year would be “too aggressive,” given the latest economic growth forecasts.

Remolona said the BSP Monetary Board must first see a “hard landing” or drastic economic slowdown to impose significant rate cuts.

He said the Monetary Board is studying to ease its policy rate by a total of 50 basis points this year if economic data signal a hard landing.

Hard landing risk

“For that to happen, there should be a risk of a hard landing and then we should be a bit more aggressive with easing. We don’t want unnecessary loss of output,” Remolona said in a forum held at Shangri-La Hotel in Mandaluyong City.

These were his replies when asked about the possibility of a 150-basis point rate reduction in the next two years estimated by Finance Secretary Ralph Recto, one of the seven members of the BSP Monetary Board, last 27 May during the Philippine Economic Briefing at the Philippine International Convention Center.

Remolona was not able to join this event which was attended by several agencies and the government’s economic team.

The country’s gross domestic output in the first quarter grew slower by 5.7 percent compared to 5.5 percent in the last quarter of 2023, the Philippine Statistics Authority said.

Meanwhile, the BSP has maintained its policy rate at 6.5 percent or 450-basis points since May 2022 to restrain excessive consumption of goods and services which leads to low inflation.

The Asian Development Bank projects the Philippine economy to grow by 6 percent this year and 6.2 percent in 2025.

The country’s Development Budget Coordination Committee is more optimistic, expecting 6 to 7 percent this year and 6.5 to 7.5 percent in the next.

Financial markets

Remolona also reiterated that the BSP will allow the financial markets to determine the peso-US dollar exchange rate as it does not see any stress yet, such as huge foreign exchange deposits or thinning gross international reserves.

“We don’t worry about the level itself. We worry more about how it gets to where it’s going. We try to guide the market by occasionally expressing our own view on where it should go,” he said.

Remolona added the BSP avoids announcing specific foreign exchange levels to prevent market overreaction. “Markets react to numbers more than they should,” he said.

The peso breached P58 per dollar last week based on data from the Bankers Association of the Philippines.