Monetary Board cut interest rates by 25 basis points

The Monetary Board cut policy rates by 25 basis points to 6.25%, noting that the balance of risks to inflation was tilted toward the downside for this year and 2025.

"At its monetary policy meeting today, the Monetary Board decided to reduce the BSP's target reverse repurchase (RRP) rate by 25 basis points to 6.25%. The interest rates on the overnight deposit and lending facilities were accordingly adjusted to 5.75% and 6.75%, respectively," Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. said in a briefing at the BSP office in Manila.

The last time the BSP cut key interest rates was in November 2020.

The BSP's cut was also ahead of the US Federal Reserve's possible cut next month.

"We expect the Fed to cut by September, possibly by 50 basis points in September and then 100 basis points until the end of 2024. And then maybe another 125 basis points in 2025. For us, that's data, that's one of the data points we look at. But it doesn't drive our monetary policy. It's just one of the numbers we consider in our decisions about monetary policy," he said.

Remolona said the country's headline inflation is projected to trend downward after the uptick in July to within the government's two to four percent target.

BSP deputy governor Francisco Dakila Jr. said the BSP's risk-adjusted inflation forecast for 2024 slightly increased to 3.3% from the previous 3.1%.

"So this represents a slight upward adjustment to 3.3 percent, largely because of the carryover from the uptick in July inflation due to higher electricity rates and fuel prices," Dakila said.

Headline inflation in July accelerated to 4.4% from 3.7% in June.

Dakila, however, said the risk-adjusted forecast for 2025 was lower at 2.9% from the previous 3%.

For 2026, the risk-adjusted inflation forecast was at 3.3%.

The BSP expects the balance of risks to the inflation outlook to continue leaning toward the downside for 2024 and 2025, with a modest tilt to the upside for 2026.

"These are mainly due to lower import tariffs on rice, and lower tariffs are expected to reduce upward pressure on domestic rice prices through higher import volumes, similar to the country's experience following the passage of the rice tariffication law," Dakila said.

On the outside risks, Dakila said the main factors would be possibly higher electricity rates and external factors such as geopolitical risks, mostly from the Middle East and Ukraine, which could impact global oil and food prices.

Remolona, meanwhile, said the BSP's Monetary Board expects domestic demand prospects to hold firm.

He said the second quarter's economic growth has been solid despite tight financial conditions, and the unemployment rate has also declined.

Remolona said public investment, easing price pressures, and robust employment conditions are expected to support economic activity.

"With inflation on a target-consistent path, the current macroeconomic outlook supports a calibrated shift to a less restrictive monetary policy stance. Nonetheless, monetary authorities remain mindful of lingering upside price risks," Remolona said.