The Bangko Sentral ng Pilipinas (BSP) on Thursday eased its policy rate by 25 basis points to 6.25 percent from 6.5 percent as the Monetary Board sees lower inflation due to cheaper rice prices, boosting private consumption.

Accordingly, interest rates on overnight deposits settled at 5.75 percent and lending facilities at 6.75 percent.

The BSP expects inflation to hit 3.3 percent this year, 2.9 percent in 2025, and 3.3 percent in 2026; tariff reduction on imported rice to 15 percent from 35 percent is seen to slash 1.8 percentage points from overall inflation.

“This outlook is supported by well-anchored inflation expectations over the policy horizon. The downside risks are linked mainly to lower import tariffs on rice, while upside risks could come from higher electricity rates and external factors,” BSP Governor Eli Remolona Jr. said.

Lower rice tariff

Economists said the lower rice tariff could free up 20 percent of household finances to spend on other goods.

Last month, the Philippine Statistics Authority (PSA) reported overall prices rose to 4.4 percent from 3.7 percent in June, exceeding the BSP target band of 2 to 4 percent.

However, Remolona said this was expected as the statistical principle called base effects added to the rise in electricity prices due to the collection of delayed payments from consumers in Metro Manila.

This scheme was agreed by the government and power distributors to compensate for higher power generation costs and is valid until September.

BSP Deputy Governor Francisco Dakila Jr. said electricity prices could increase if tensions in the Middle East worsen, reducing oil supply and causing disruptions to trade routes.

“With inflation on a target-consistent path, the current macroeconomic outlook supports a calibrated shift to a less restrictive monetary policy stance,” Remolona said.

Consumption boost

Remolona added that the BSP cut its policy rate to spur higher consumption among households and firms as loans for various purchases will become cheaper.

PSA data showed household consumption grew slower in the second quarter at 4.6 percent compared to government spending at 10.7 percent year-on-year amid the previous BSP rate of 6.5 percent.

“As inflation goes back to the target, that will provide impetus to consumption. But for the near term, we’re still expecting a negative output gap,” Dakila said.

Given the relatively normal local and economic conditions and possible inflation downtrend, Remolona said he maintains his stance to ease the policy rate by another 25 basis points either in October or December to further drive economic growth next year.

“There’s no bad surprise; nothing that we see on the horizon. The most important policy horizon for us is 2025 because there are long lags in the transmission of monetary policy,” he said.

“We expect private consumption to become somewhat stronger. Public investment alongside easing price pressures and robust employment conditions are expected to support economic activity,” Remolona continued.