The Bangko Sentral ng Pilipinas (BSP) may opt to maintain current interest rates while focusing on further reducing bank reserve requirements to support economic growth, according to Bank of the Philippine Islands (BPI) senior economist Emilio Neri.

“Further reduction in the reserve requirement ratio appears more feasible,” he said.

“Keeping interest rates steady could allow the BSP to advance this much-needed reform while supporting the economy with additional liquidity.”

Rate cuts usually lead to a weakening of currencies, but Neri pointed out that the Peso remained stable after the BSP's announcement on 21^st February of a 200-basis point (bps) reduction in the reserve requirement ratio (RRR).

This followed the BSP's decision on 13^th February to halt interest rate cuts, after three consecutive 25-basis point reductions in 2024, bringing the policy rate to 5.75%, The Manila Times reports.

“On balance, uncertainty about the outlook for inflation and growth warrant keeping monetary policy settings steady,” the central bank said of the move by its policymaking Monetary Board.

“Before deciding on the timing and magnitude of further reductions in the policy interest rate, the Monetary Board deems it prudent to await further assessments of the impact of global policy uncertainty and the potential effects of the actual policies,” it went on to add.

The RRR cut, set to take effect on 28^th March, is expected to boost loan growth, enabling banks to provide more credit to businesses and consumers. Analysts estimate that around P400 billion in funds, which would otherwise remain with the BSP, will be unlocked and made available for lending.

“The financial system is well-positioned to absorb this liquidity in an orderly manner, supported by the central bank's liquidity tools,” Neri said, adding that although inflation is gradually slowing, the BSP must exercise caution before reducing the policy rate.

Yet he said, “slower inflation keeps the door open for BSP rate cuts this year, especially if the GDP data in May falls short of expectations.”

GDP growth fell short of expectations for the second consecutive year in 2024, missing the government's target of 6.0-6.5% with a result of 5.6%. The target for this year is set between 6.0-8.0%, with preliminary data for the first quarter scheduled to be released on 8^th May.