‘Rate cut aims to support growth amid rising risks’

MANILA, Philippines — The latest policy rate cut of the Bangko Sentral ng Pilipinas was driven by the need to support domestic growth, which has been hit by rising global uncertainties that could dampen both investment and consumption, BSP Governor Eli Remolona Jr. said.

“We’re trying to keep our economy operating as close to capacity as possible,” Remolona told One News’ Money Talks host Cathy Yang. “That capacity has to grow because of investment, and our role is to keep the economic environment stable enough for that investment to materialize,” he said.

“I think all things considered, our growth is still robust. It’s still pretty good. Nonetheless, I think it’s not as strong as it could be, which is part of the reason why we cut the policy rate,” Remolona said.

The Philippine economy grew by 5.4 percent in the first quarter, below the government’s six to eight percent full-year target.

To meet the lower end of that range, growth will have to hit at least 6.2 percent in the remaining quarters – a goal Remolona said is still achievable, but increasingly challenged by geopolitical risks.

“There’s a new source of uncertainty in the last week or so,” he said, referring to the escalating conflict in the Middle East.

“That uncertainty means big-ticket consumption items get postponed. It also postpones investment. So that leads to a weakening of growth,” the BSP chief added.

To address these risks, the BSP has lowered its key interest rate by 25 basis points to 5.25 percent. Remolona said the decision reflects a shift in the BSP’s approach toward scenario-based analysis rather than averaging out risks.

“Instead of looking at fan charts, we now look at scenarios,” he told CNBC’s JP Ong in a separate interview.

“We separate the big risks into a separate scenario and then we make a decision based on our judgment and the data,” he said.

While the central scenario still supports low and manageable inflation of around 3.4 percent in 2026, Remolona said a worst-case outcome could push inflation to above five percent if oil prices soar to $100 per barrel and the peso sharply weakens.

Remolona also said the next rate move could happen as early as August, but the central bank is also prepared to pause if risks worsen.

“We could do another rate cut in August or we could pause and do the rate cut in October instead,” Remolona said. “We’re looking at the data every day.”

He noted that food prices have surprised to the downside, giving the BSP more room to ease. The improvement was due to better agricultural output, effective non-monetary measures by the government and the peso’s strength earlier this year.

While the peso has recently slipped back to the 57:$1 level, Remolona explained that the depreciation is mostly driven by a stronger dollar due to safe haven demand.

Still, he warned that persistent peso weakness could become inflationary.

“We look at thresholds for depreciation of the peso,” he said. “Once some threshold is breached, we would come in (and intervene) more significantly.”

Remolona also emphasized that the BSP is no longer closely shadowing the US Federal Reserve in its policy decisions, thanks to diverging domestic fundamentals.

The BSP is also evaluating whether there is room to cut banks’ reserve requirement ratio further to improve the transmission of monetary policy, after reducing it to five percent earlier in February.