By Luisa Maria Jacinta C. Jocson, Journalist
THE BANGKO SENTRAL ng Pilipinas (BSP) might reduce interest rates by 50 basis points (bps) this year, according to its leading official.
“Seventy-five basis points could be excessive, perhaps 50 bps. We require a bit of policy safeguarding,” BSP Governor Eli M. Remolona, Jr. remarked to reporters during the BSP Media Information Session in Baguio City on Saturday.
Mr. Remolona indicated that this could be executed in increments of 25 bps each in the first and second halves of the year.
“I believe that seems appropriate, 25 bps (in the) first half, 25 bps (in the) second half. Not every meeting we’ll observe a policy rate reduction,” he continued.
The central bank initiated its easing cycle in August last year, reducing borrowing costs by a total of 75 bps by the end of 2024.
The Monetary Board executed three consecutive rate reductions, lowering the benchmark to 5.75%.
Mr. Remolona stated “there is no necessity” for a 100 bps worth of cuts this year as the nation is far from a “hard landing” situation.
“Central banks globally have learned to proceed gradually except in cases of an imminent hard landing. A hard landing typically requires a reduction of more than 25 bps. We don’t foresee a hard landing in the near future,” he noted.
On Friday, Mr. Remolona mentioned that a rate cut remains a possibility at the Monetary Board’s initial policy review meeting this year on Feb. 13.
The BSP leader stated that a negative output gap could trigger further monetary loosening.
“Currently, we have somewhat of a negative output gap. We’re growing at slightly below capacity and whether that (growth) figure widens that gap is uncertain, as it pertains to our capacity and how much we’re actually growing.”
“If the gap is expanding, if it turns more negative, then it would necessitate further easing,” he added.
The Philippines’ gross domestic product (GDP) grew by 5.6% in 2024, falling short of the government’s target of 6-6.5%.
In the fourth quarter, GDP growth increased by a disappointing 5.2%, marking the slowest figure since the 4.3% recorded in the second quarter of 2023.
Meanwhile, Mr. Remolona indicated that they are also observing the movements of the US Federal Reserve but do not feel compelled to strictly align with the US central bank.
“Naturally, it influences our actions because it affects the economy and inflation rates. In that sense, it impacts our decisions, but we don’t emulate them. We don’t merely follow their lead.”
The Fed, during its January meeting, maintained benchmark interest rates as anticipated, after reducing a full basis point in 2024. This represents the first pause since the beginning of its easing cycle in September, as reported by Reuters.
RRR CUT
Meanwhile, the BSP chief indicated that the central bank is considering another reduction in banks’ reserve requirement ratio (RRR) this year.
The Monetary Board aims to decrease reserve requirements by 200 bps to 5% this year, he mentioned.
“That’s the figure we’re discussing, 200 bps. From 7% to 5% for the major banks,” Mr. Remolona added.
This may be executed sometime in the middle of the year, he suggested, likely in June or July.
The central bank previously lowered the RRR for universal and commercial banks and nonbank financial entities with quasi-banking functions by 250 bps to 7% from 9.5%, which took effect last October.
It also reduced the RRR for digital banks by 200 bps to 4% and for thrift lenders by 100 bps to 1%. The RRR for rural and cooperative banks was also decreased by 100 bps to 0%.
“In essence, the policy rate cut serves as a substitute for lowering the reserve requirements. They exert similar effects on the economy… We wish to reduce it further, but timing is crucial, as we are also reducing the policy rate,” Mr. Remolona remarked.
“The advantage of the reserve requirement is that it influences both the deposit rate and the lending rate. Therefore, it should slightly elevate the deposit rate if you lower the reserve requirement while decreasing the borrowing rates.”
The RRR is the portion of reserves that banks must retain to ensure they can cover liabilities in cases of sudden withdrawals. When a bank is mandated to hold a lower reserve ratio, it has more capital to lend to borrowers.
From a peak of 20% in 2018, the central bank has since reduced reserve requirements to single-digit levels.
