IMF: BSP has room for gradual rate cuts

THE Bangko Sentral ng Pilipinas (BSP) could gradually reduce its policy rate and shift toward a neutral monetary stance but warned of risks from supply shocks, the International Monetary Fund (IMF) said.

“Moving to a neutral stance through continued gradual reduction of the policy rate is appropriate,” the IMF said in the Philippine Staff Report.

“A data-dependent approach and careful communication around policy settings will be important to manage expectations amid uncertainty around inflation and the US monetary policy path,” it added.

The IMF, however, noted that a “measured reduction” in the policy rate could be appropriate, considering the return of inflation to target levels and the emergence of a negative output gap.

It emphasized that any rate adjustments should be cautious and data-driven, ensuring that inflation expectations remain firmly anchored within the target band.

“Along the declining rate path, the BSP must ensure that its stance continues to anchor inflation and inflation expectations firmly within the target band,” it said.

The BSP policymaking body Monetary Board has already slashed key rates by a total of 75 basis points (bps), ending the year with rates at 5.75 percent.

It began easing in August, ordering a 25-bps cut as inflation returned to the 2.0- to 4.0-percent target, and followed this with another 25 bps reduction in October.

BSP Governor Eli Remolona Jr. already stated that they “will maintain an easing posture” but a “100 bps over 2025 would be too much.”

He stressed that they are taking “baby steps” as they “still worry that inflation might start to rise again.”

The IMF highlighted the importance of balancing inflation and growth risks in setting monetary policy.

While inflation risks remain tilted to the upside due to potential future shocks and second-round effects, downside risks to growth — such as weaker-than-expected domestic demand recovery — might necessitate a quicker rate cut.

A data-dependent approach, coupled with clear and effective communication, is deemed crucial to manage market expectations and navigate the uncertainties surrounding inflation and economic recovery, it added.

“Amidst prevailing uncertainties, effective monetary policy communication will be important to manage expectations and provide more clarity on the BSP’s reaction function,” the IMF said.

“Over time, the BSP can consider further enhancing its communication framework by expanding its use of forward guidance in line with IMF technical assistance (TA) advice,” it added.

The IMF also warned of the need for the BSP to adapt to more frequent and severe supply-side shocks.

The Philippines’ reliance on imported fuel and food, limited price controls, and vulnerability to climate events have made its inflation dynamics more sensitive to supply factors than demand factors.

“The BSP will need to be careful in “looking through” them to ensure second-round effects do not lead to a de-anchoring of inflation expectations,” the IMF said.

The IMF projected the inflation rate to average 3.2 percent this year and 2.8 percent in 2025. This is within the 2.0 to 4.0 percent target of the central bank.

“Nonfood commodity prices were more benign than expected, and the impact of El Niño on food and electricity prices was not as high as feared,” it said.

“While food prices continue to pose risks, the measures to contain food prices have contributed to lower inflationary risks,” the IMF said.