High Borrowing Rate Prevails, Central Bank Remains Cautious

Amid a faltering peso and high inflation rate, the Monetary Board, the Bangko Sentral ng Pilipinas’ (BSP)’s policy–making body, has decided to keep interest rates unchanged and maintain its cautious stance.

The Monetary Board decided to maintain its benchmark interest rate at 6.50 percent, for the sixth consecutive time, keeping it at its highest level since 2007. This bias for a higher rate level, in turn, prevents banks from lowering their own borrowing rate for individuals and businesses, keeping the cost of doing business high.

In a statement, the BSP explained that the inflationary pressure has softened, mitigated by government’s move to reduce the tariff on rice imports. But higher prices of other food items apart from rice, transport charges, and electricity rates continue to pose risks.

Overall, the Philippines’ Central Bank still expressed cautious optimism of an improvement in the second quarter, persuading it to reduce its inflation forecasts for 2024 and 2025 to 3.1%, buoyed by the economy’s long-term prospects.

“Inflation is moving closer to the midpoint of the 2 – 4 percent target range. The risk-adjusted inflation forecasts have eased to 3.1 percent for both 2024 and 2025 from 3.8 percent and from 3.7 percent, respectively,” BSP Governor Eli Remolona said in a statement.

The BSP added that it is likewise keeping a close watch on uncertainties in the external and geopolitical environment, for any potential spillover. Global economies continue to monitor the situation in Gaza, Iran, and Ukraine, the upcoming US elections in November, and tensions in the West Philippine Sea.

These same factors, along with the US Federal Reserve’s decision to keep its own interest rates high, have likewise dragged the peso lower.

The Philippine peso closed at a 20-month low of PHP 58.86 against the US dollar on June 26, 2024. Analysts expect it to test the PHP 59 level, especially given the Philippines’ Central Bank’s preference to allow natural market forces to prevail and only engage in minimal interventions in the foreign exchange market. 

Looking ahead, the BSP said it will ensure that monetary policy settings remain in line with its primary mandate to safeguard price stability conducive to sustainable economic growth.