Delayed easing to dampen growth — BSP chief

By Luisa Maria Jacinta C. Jocson, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) said that it should not “wait too long” to begin policy easing as this would dampen economic growth, its top official said.

BSP Governor Eli M. Remolona, Jr. said on Monday that the central bank is trying to “strike a balance” between supply and demand to ensure stable prices.

“At this point, in the last mile, we’re almost there, but we have to be more careful than before. Because there’s a risk we might overdo it. There’s a risk we might cause unnecessary loss of output, and we want to minimize that risk,” he said at the Economic Journalists Association of the Philippines-San Miguel Corp. economic forum.

The BSP has kept policy rates at a 17-year high of 6.5% since October last year. It has raised rates by a cumulative 450 basis points (bps) from May 2022 to October 2023 in order to tame inflation.

The last time the BSP cut rates was in November 2020, when it delivered a 25-bp cut, bringing the key rate to 2% to support economic recovery amid the COVID-19 pandemic.

“When I said that we have to be cautious or we have to be careful, that basically means we have to not wait too long for easing because the longer we wait for easing, the more likely it is that we will cause a loss of output, which we don’t want,”  Mr. Remolona said.

“That’s basically where we stand. We’re not going to raise (rates).”

Gross domestic product (GDP) grew by a weaker-than-expected 5.7% in the first quarter, slower than 6.4% a year ago.

To meet the government’s 6-8% growth target, the GDP expansion should average 6.1% in the next three quarters.

Preliminary second-quarter GDP data will be released on Aug. 8, ahead of the Monetary Board’s next policy review on Aug. 15.

The BSP chief said they are still “on track towards reducing rates” despite risks to the inflation outlook. He earlier said that the central bank can cut by 25 bps in the third quarter, and by another 25 bps in the fourth quarter.

“The 3.7% (inflation) is better than expected, so there’s a bit more scope for easing, possibly in August,” he said.

Headline inflation eased to 3.7% in June from 3.9% in May. This also marked the seventh straight month that inflation settled within the BSP’s 2-4% target range.

Mr. Remolona said recent measures such as Executive Order (EO) No. 62 would help tame prices.

“The nonmonetary measures that the government has put in place, especially EO No. 62, are so helpful, because that will help us get to where we want to go, which is stable prices.”

The executive order, signed by President Ferdinand R. Marcos, Jr. last month, slashed tariffs on rice imports to 15% from 35% previously, until 2028. It is largely expected to bring down retail rice prices and overall inflation.

Mr. Remolona also reiterated that the BSP does not need to wait for the Fed before it begins cutting rates.

“I think the Fed is not the most important data among the numbers that we look at. It affects our exchange rate, as you saw, the exchange rate affects inflation, so that’s factored in, but it’s not a decisive factor,” he said.

PESO WEAKNESS
Meanwhile, Mr. Remolona said that the BSP monitors the peso to ensure it does not “depreciate too sharply,” citing its impact on trade.

“We don’t want too much volatility in the peso. We want the peso to move based on fundamentals. When there’s too much volatility, it’s bad for trade. It’s bad for both imports and exports. So, we want to make the movement of the peso smoother,” he said.

The peso has been trading at the P58-per-dollar range since it first sank to that level in May.

Mr. Remolona again said that the peso’s performance is a case of a “strong dollar” due to safe-haven demand.

“The dollar has become the single most important safe-haven currency. Whenever you have tensions around the world, the dollar is stronger. In fact, even if the uncertainty is in the US, it makes the dollar stronger,” he said, adding that other currencies have also depreciated against the US dollar.

He said that the US Federal Reserve’s latest signals have also impacted recent currency movements.

“The Fed has been saying it’s going to be higher for longer and that has weakened all the other currencies against the US dollar,” he said.

The Fed at its most recent policy meeting in June left interest rates unchanged at 5.25%-to-5.5%, and fresh projections from policy makers showed them dialing back expectations for rate cuts this year from three to just one, Reuters reported.

Financial markets and some policy makers, however, still expect the Fed to deliver two cuts of a quarter-point each by yearend.

RRR CUT
Meanwhile, the BSP governor also reiterated that they plan to lower the reserve requirement ratio (RRR), although the timing has yet to be decided.

“We have one of the highest reserve requirements in the region. It doesn’t make sense to me that we should be more strict. In fact, the ideal number is zero. It’s a matter of timing,” he said.

The BSP has already brought down the RRR for big banks to a single-digit level last year from a high of 20% in 2018.

In June 2023, the BSP slashed the ratio for big banks and nonbank financial institutions with quasi-banking functions by 250 bps to 9.5%.

“We don’t want to bring it down while we’re still at kind of a somewhat tight monetary policy,” he added.

Mr. Remolona earlier said he is seeking to bring down the RRR to as low as 5%.