Prolonged rate cut delay unlikely, analysts say

The Bangko Sentral ng Pilipinas (BSP) might have to resume cutting rates soon, analysts said, arguing that the still tight financial conditions could weigh on the economy at a time of increasing global uncertainties.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said real interest rates—or the actual cost of borrowing after factoring in inflation—were still “way too high” despite the 75-basis point (bp) cut since August 2024.

This means that the surprise rate freeze last week won’t last long, Chanco said, while sticking to his forecast of a 100-bp total rate reduction this year. That is more dovish than the half-percentage point cumulative cut that BSP Governor Eli Remolona Jr. had telegraphed to the market.

“We highly doubt this will mark the start of a prolonged pause; in fact, we’re still more than content with our base case,” Chanco said in a commentary.

Economic recovery

“The reason why we’re sticking to our guns is that the real policy rate remains historically tight, and only modest cuts from here on out would unnecessarily risk delaying the economy’s recovery,” he added.

At its first policy meeting for this year, the central bank decided to keep the benchmark rate that banks typically use as a guide when pricing loans untouched at 5.75 percent. The move defied market expectations, with Remolona admitting that it was not an easy decision for monetary authorities.

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For market observers who had projected another modest rate cut, a benign inflation that steadied at 2.9 percent in January gave the BSP enough space to focus on supporting economic growth, which had fallen short of both consensus and the Marcos administration’s target last year.

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But the BSP boss had explained that the pause would help the central bank better assess the impact of back-to-back tariff actions in the United States on inflation and the domestic economy. Once the clouds of uncertainties clear, Remolona said the BSP may resume easing.

Attentive to risks

In a separate commentary, Euben Paracuelles and Nabila Amani, economists at Nomura, described the BSP’s decision as a “puzzling pause.”

“Global policy uncertainty is likely negative for the growth outlook via a few channels,” they said. “As such, we view this as an additional justification to cut the policy rate again, not stay on hold.”

But Romeo Bernardo, a member of the Monetary Board, the policymaking body of the BSP, said the central bank was being “attentive to the risks to our inflation outlook.”

“Although our primary focus is inflation, in calibrating the monetary stance, we also take into account the impact on the real and financial sectors to ensure that the country remains resilient on a wide front,” Bernardo said in a speech before corporate directors last week.

“Let me be clear that the BSP looks to continue its measured shift toward less restrictive monetary policy settings but it will remain data-dependent in deciding on the pace and timing of further reductions in the policy rate,” he added. INQ