The Bangko Sentral ng Pilipinas (BSP) reduced its reverse repo rate by 25 basis points to 4.25% on Thursday, extending the central bank's easing cycle to a cumulative 225 basis points of cuts.
The decision was largely expected by market participants - 25 of 27 analysts polled by LSEG anticipated the move. Despite language at the BSP's December meeting suggesting the easing cycle was "nearing its end," policymakers opted to provide further accommodation to the economy.
Recent economic indicators underline the rationale for continued monetary support. Fourth-quarter gross domestic product expanded by just 0.6% quarter-on-quarter, while year-on-year growth slowed to 3.0%. That pace marks the weakest annual growth outside of the pandemic period since 2011, underscoring a notable loss of momentum.
Officials cited an ongoing corruption scandal as a significant factor weighing on the economy. The scandal has had a pronounced effect on public investment spending, contributing to softer government expenditure and reduced overall economic activity. Those developments, coupled with persistently low inflation, informed the BSP's choice to continue easing policy.
The central bank framed the rate reduction as a response to weakening economic momentum tied to fiscal headwinds. By lowering the reverse repo rate, the BSP aims to sustain accommodative financial conditions while policymakers monitor developments related to public spending and inflation dynamics.
Context and implications
- The rate cut extends an easing cycle that has delivered a total reduction of 225 basis points.
- Growth indicators - notably a 0.6% quarterly increase and 3.0% annual expansion in Q4 - signaled subdued demand.
- The corruption scandal has had a material impact on public investment and government spending, weighing on overall economic activity.
As the BSP adjusts policy, market participants and policymakers will be watching the trajectory of public investment, government spending, and inflation to assess whether further accommodation will be necessary.