Rates taper by H2 — BSP

A rate cut ‘definitely’ remains on the table for the year, though he clarified that the second half would be a more likely timeframe

The Bangko Sentral ng Pilipinas, or BSP, hinted at the possibility of cutting interest rates later in 2024, while acknowledging the need for caution due to distortions caused by comparing data to low inflation figures from the previous year.

In an interview after a reception event with private bankers last Friday, BSP Governor Eli Remolona said a rate cut “definitely” remains on the table for the year, though he clarified that the second half would be a more likely timeframe.

“Yes, definitely, within the year. The first semester is too soon, but we’ll see,” Remolona said when asked about the timeframe of possible monetary easing.

BSP increased its benchmark rate by a cumulative 450 basis points starting from May 2022 to control inflation, which included an unexpected raise in October last year.

Nevertheless, the rates remained unchanged in the last two meetings of 2023.

When pressed on the possibility of a rate hike in the face of strong economic growth, Governor Remolona cautiously said, “Well, if the growth is strong, it will leave more room to hike.”

Shift in strategy possible

In a separate interview, Finance Secretary Ralph Recto hinted at a potential shift in the government’s borrowing strategy, suggesting a possible move towards concessional loans.

Recto expressed optimism about the global economic outlook, stating that market consensus points towards a decline in both inflation and interest rates.

“We expect interest rates to go down in the second half (of the year). But so far, the market consensus is that inflation and interest rates will decrease globally, in the US and the Philippines,” he said, emphasizing the dependence on data and external factors.

Recto added that the anticipated decrease in borrowing costs could pave the way for increased investments, both from domestic and external sources.

More investments, less costs

“Lowering interest rates, of course, will decrease the government’s (...) borrowing costs. But more importantly, more investment will come in,” Recto said.

The Finance Secretary, however, remained cautious in committing to specific plans. When asked if the potential drop in interest rates would lead to increased borrowing, he responded, “No,” highlighting the importance of investment over simply taking on more debt.

Recto said the country is set to borrow from external sources and invest domestically in the country’s domestic business pledges.

However, the Finance Chief remained cautious about committing to a specific increase in borrowing, stressing that the decision would depend on available data and economic conditions.

He pointed out that the Monetary Board, of which he is a member, makes interest rate decisions based on careful analysis of inflation and other economic indicators.

“(Lowering interest rates) will all depend on the data,” Recto said.

However, he emphasized the need for data-driven decision-making and careful consideration of base effects before making any policy changes.