By Katherine K. Chan
THE BANGKO SENTRAL ng Pilipinas (BSP) unexpectedly slashed its policy rate by 25 basis points (bps) for a fourth straight meeting on Thursday, citing a weakened economic outlook and declining investor confidence amid a widening corruption scandal.
The Monetary Board reduced the target reverse repurchase rate by 25 bps to 4.75%, the lowest in three years or since September 2022.
Rates on the overnight deposit and lending facilities were also lowered by 25 bps each to 4.25% and 5.25%, respectively.
“The Monetary Board… noted that the outlook for domestic economic growth has weakened. This outlook reflects in part the impact on business confidence of governance concerns about public infrastructure spending,” it said in a statement.
The rate cut came as a surprise as most analysts expected a pause in monetary easing. Only six out of 16 analysts polled by BusinessWorld last week predicted a 25-bp cut.
The central bank has now lowered borrowing costs by a total of 175 bps since it began its easing cycle in August 2024.
After the BSP’s announcement, the peso fell by 28.5 centavos to close at P58.235 versus the dollar on Thursday from its P57.95 finish on Wednesday, Bankers Association of the Philippines data showed.
The Philippine Stock Exchange index fell by 0.67% to close at 6,057.40 on Thursday.
“This decision reflects our latest economic conditions as well as judicious adjustments to our model. These adjustments reflect the new importance of business sentiment in light of the issues related to government infrastructure spending,” BSP Governor Eli M. Remolona, Jr. said during a briefing.
A corruption probe into anomalous infrastructure projects has embroiled government officials, including lawmakers, the Public Works department and contractors. They are accused of pocketing millions of pesos in government funds meant for flood control projects, prompting widespread anger among citizens.
Mr. Remolona said the corruption scandal has weakened business sentiment and in turn, weighed on the economic growth outlook in the near term.
“Governance concerns on public infrastructure spending have weighed on business sentiment. The stock market has declined, and there are now fewer companies with expansion plans,” Mr. Remolona said.
“We need a credible resolution to this issue.”
The BSP kept its gross domestic product (GDP) growth forecast for this year at 5.5%. If realized, GDP would be at the lower end of the government’s 5.5-6.5% growth target.
It expects economic growth to pick up to 6% in 2026, at the low end of the government’s 6-7% goal.
BSP Deputy Governor Zeno Ronald R. Abenoja noted that there is a “greater probability” that the country’s economic growth will fall short of the target.
“There could be some adjustments later on, but we want to better understand how the National Government and the business community respond as this crisis evolves,” he said.
Mr. Remolona said investments not going where they are supposed to go has caused the economy to underperform, leading to a wider-than-expected output gap.
“As the extent of the issues related to infrastructure spending became clear, our estimates of the output gap needed to be recalibrated. We now think the gap is wider than we thought,” he said. “All in all, we see more scope for a more accommodative policy… We have more wiggle room than before.”
Asked if developments in the country now outweigh external factors, Mr. Remolona said: “The external factors are still there. They’re still affecting our outlook. But I do think that these governance issues are a bigger factor for now.”
The Monetary Board also noted indications of “moderating demand” that reflect “lingering uncertainty from the external environment.”
MORE RATE CUTSMeanwhile, Mr. Remolona said there could be another rate cut at the next policy meeting in December, adding it is possible there could be further easing next year.
“The favorable inflation outlook and moderating domestic demand provide room to further support economic activity,” the BSP said.
Mr. Remolona said that the nominal rate could settle between 4% and 5%.
The central bank also said inflation remains “quite benign,” but potentially higher electricity rates and increased tariffs on rice imports pose limited inflationary pressures.
It lowered its inflation projections for next year to 3.1% from 3.3% and for 2027 to 2.8% from 3.4%.
Inflation picked up to a six-month high of 1.7% in September due to costlier vegetables and fuel, but was still below the 2-4% target. This brought the nine-month average to 1.7%.
Analysts expect the Monetary Board to deliver another 25-bp cut in December to bring the rate to 4.5% by yearend.
Nicholas Antonio T. Mapa, chief economist at Metropolitan Bank and & Trust Co., said in a Viber message that the latest cut reflects BSP’s efforts to support “moderating economic growth momentum” ahead of the third-quarter GDP report.
“Given the rather dovish statement, we retain our (December) rate cut call with (the BSP) possibly taking rates to 4.5% by end 2025. The focus is growth while inflation dynamics allow them to work back aggressive rate cuts from the post pandemic,” he added.
Third-quarter GDP data will be released on Nov. 7.
“Our core view now is that the Board will cut again at the next meeting, to a terminal level of 4.5%, given its decidedly more dovish October statement,” Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said.
ANZ Research said the subdued growth and inflation outlook gives the BSP room to deliver two more 25-bp cuts until the first quarter next year to bring the key policy rate to 4.25%.
“A tighter fiscal policy is not desirable at this stage of the business cycle when prospects for other growth drivers including exports and household consumption are also not robust,” ANZ economist Arindam Chakraborty and Chief Economist Sanjay Mathur said in a report.
Meanwhile, Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., noted that the latest rate cut brings the differential rate between the BSP and the US Federal Reserve to 50 bps, its narrowest yet.
The Federal Reserve’s current policy rate stands at the 4-4.25% range.
Mr. Ricafort likewise expects another 25-bp cut on Dec. 11, “essentially matching the total of (50 bps) additional Fed rate cuts for the rest of 2025 to maintain healthy interest rate differentials as well.”