by Luisa Maria Jacinta C. Jocson, Senior Correspondent
The Bangko Sentral ng Pilipinas (BSP) indicated the potential for two additional rate reductions this year, according to its leading official, with a rate decrease on the agenda as soon as June.
“Perhaps two more reductions. Not necessarily back-to-back. Still 25-basis points (bps) at a time, based on what we understand about the current situation,” BSP Governor Eli M. Remolona, Jr. informed reporters during a press conference on Friday.
“The challenging aspect is we don’t possess all the answers. This is uncharted territory for most central banks. That’s the most unsettling part,” he further explained.
The Monetary Board in April lowered benchmark interest rates by 25 bps, adjusting the policy rate to 5.5%.
The central bank has thus far decreased borrowing costs by a cumulative total of 100 bps since initiating its easing cycle in August of the previous year.
Mr. Remolona mentioned that a rate reduction is still under consideration at the Monetary Board’s forthcoming policy meeting on June 19.
“Up to now, the hard data indicates we have ample capacity to lower inflation, particularly because inflation is low,” he added.
Headline inflation in April dropped to an over five-year low of 1.4%, resulting in a four-month average of 2%.
Considering risks, the BSP anticipates inflation to average 2.3% this year.
“However, we must exercise caution because we don’t want to cut excessively. If we reduce rates to a point where demand surpasses capacity, that would lead to inflation,” he explained.
The central bank is expected to keep implementing rate reductions in “baby steps” or increases of 25 bps.
“There’s room for more incremental steps,” Mr. Remolona added.
There are four remaining Monetary Board policy meetings scheduled for this year in June, August, October, and December.
“In the meantime, we’re working on enhancing the transmission mechanism. Thus, a rate decrease may be more effective, somewhat more effective than previously,” he said.
The BSP is also updating its frameworks and models to more accurately account for global uncertainties.
“We’re quite uneasy with our typical analysis, our conventional models…because that framework was created for a different context.”
“Currently, we are contemplating various scenarios more rigorously, as our monetary policy will be influenced somewhat by those scenarios,” he said.
US CREDIT RATING
In the meantime, the BSP chief noted they are contemplating reducing their holdings of US Treasuries to lessen exposure to the US following the recent credit rating downgrade.
“We’re examining it. The US is presently rated double ‘A.’ It’s different when debts of other nations are downgraded. But the downgrading of US Treasuries? That’s significant,” Mr. Remolona remarked.
Moody’s Ratings last week reduced the US’ long-term issuer and senior unsecured ratings to “Aa1” from “Aaa,” changing its outlook to “stable” from “negative.”
It stated the downgrade “reflects the rise over more than a decade in government debt and interest payment ratios to levels that are considerably higher than similarly rated sovereigns.”
This action stripped the US of its final triple-A rating from the major three credit agencies.
In 2011, S&P Global Ratings downgraded the US’ sovereign long-term credit rating to “AA+” from the highest investment grade of “AAA.” Fitch Ratings in 2023 similarly downgraded the country’s rating to “AA+” from “AAA.”
“Nonetheless, it remains the most liquid market. The dollar continues to be the leading currency regarding international lending, borrowing, and investment,” Mr. Remolona commented.
“Thus, it’s likely to stay a crucial component of our reserves,” he added.