The Bangko Sentral ng Pilipinas (BSP) remains committed to easing monetary policy, but the pace and magnitude of interest rate cuts, as well as adjustments to banks’ reserve requirement ratio (RRR), will be primarily determined by economic growth and inflation.
“Let me say that we still see ourselves in the (monetary policy) easing cycle. We expect to implement a few more cuts this year. However, the exact amount and timing are yet to be determined,” BSP Governor Eli Remolona told the Tuesday Club, a group comprised mainly of news editors and other media and public relations professionals.
“We have several scenarios in mind… we compare these scenarios and monitor how inflation is evolving, how growth is evolving. It’s a balancing act between inflation and growth,” he added.
Remolona emphasized that as long as economic indicators remain on track, the BSP would proceed with “baby steps,” meaning rate cuts of 25 basis points at a time. However, he noted that if economic conditions deteriorate—if the economy looks poised for a hard landing—a larger cut of 50 basis points or more could be considered.
Since it began lowering interest rates in August last year, the BSP has lowered its target reverse repurchase rate from 6.50 percent to 5.75 percent. While the BSP paused rate cuts during its meeting last month, Remolona said that a further reduction is still “on the table” for its meeting scheduled for early April.
Although the BSP paused its rate cuts in February, it has continued to reduce the reserve requirement ratio for banks. Since September, the BSP has cut the RRR for universal and commercial banks by a total of 450 basis points. When the latest reduction takes effect on March 28, the RRR for major banks will drop to 5 percent from 9.5 percent at the start of RRR cutting cycle. Each basis point reduction releases about P160 billion in fresh liquidity into the financial system.
Remolona said further RRR reductions are possible depending on the liquidity in the financial system and the needs of the economy. He said the Philippine banking system may even see zero RRR in the future as is now practiced in the US.
When asked about the importance of the peso exchange rate in the central bank’s projections, Remolona responded, “We monitor the exchange rate, but not because we want the peso to stay low or high. We track it because of its potential impact on inflation.”
