BSP's Less Restrictive Monetary Policy to Remain Data-Driven

PHILIPPINES - In Brief 20 Dec 2024 by Diwa Guinigundo
As we indicated in two broadcast interviews on the next move of the Bangko Sentral ng Pilipinas (BSP) the other day, the Philippines’ monetary authority was likely to sustain its less restrictive monetary policy. And yesterday, the BSP adhered to such monetary stance and reduced by 25 basis points (bps) the policy rate from 6.0% to 5.75%, the third 25 bps reduction in 2024 and the last during the year. Overnight deposit and lending rates were also adjusted to 5.25% and 6.25%, respectively. It was appropriate for the BSP to describe its shift to less restrictive monetary policy because it was doing it in gradual, baby steps rather than reducing its policy rates immediately to the neighborhood of its latest inflation forecasts for 2024-2026, or the upper end of its 2-4% inflation target this year through 2026. Its risk-adjusted inflation forecast for 2025 was actually jacked up from 3.3% during the last meeting in October to 3.4% this December, while 2026 is expected to yield an unchanged 3.7% risk-adjusted inflation forecast. At 5.75%, the real policy rate remains positive given the lower baseline and risk-adjusted inflation forecasts ranging from a low of 3.3% (for 2025, baseline) to a high of 3.7% (for 2026, risk-adjusted). Given the risks, the BSP must be conserving its ammunition and chose to remain data-dependent. There are three reasons why the market expected the BSP to reduce its policy rate, with 13 out of 16 economists and market observers correctly predicting a 25 bps reduction. One, the inflation forecasts fell within the target range 2-4% for this year and the next two years. Given its substantial flexibility, the BSP can afford to reduce its policy rate gr...

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