THE current inflation environment will mean only marginal benefits from further rate cuts, a Bank of the Philippine Islands (BPI) economist said.

“With real interest rates still in negative territory, we reiterate our view that it might be more difficult to bring down policy rates further in the coming months,” BPI Lead Economist Emilio S. Neri, Jr. said in a note issued Tuesday.

Headline inflation was 2.4% in August while the overnight reverse repurchase rate was at a record low 2.25%.

Oil prices are unlikely to lift inflation beyond the central bank target of 2-4% this year despite the beginnings of a recovery in consumer demand, Mr. Neri added.

The Bangko Sentral ng Pilipinas (BSP), to support the economy during the pandemic, brought down overnight lending and deposit rates to record lows of 2.75% and 1.75% respectively.

For now, a strong fiscal response to support the private sector will be more important than bringing rates further down, Mr. Neri said.

“Risk aversion both on the part of the banks and the private sector will most likely limit the expansion of lending. The real demand for loans on the part of corporates and consumers has also weakened given the lack of expansion activities,” he said.

Bank lending growth was 6.7% year on year in July, the slowest pace since March 2010’s 5% expansion, central bank data showed.

Meanwhile, Mr. Neri said the monetary support that has already been unleashed by the BSP will keep bond yields low in the near term.

“However, risks related to inflation and the exchange rate remain elevated and can put a floor on further policy rate cuts in the near term,” he said.

The central bank kept key rates steady in August, “a prudent pause” after aggressive cuts in previous meetings. BSP Governor Benjamin E. Diokno has said rates are likely to be maintained in the next few quarters because monetary measures were designed to get ahead of the crisis. He added there is room for further action if the need arises.

The Monetary Board’s next policy meeting is set for Oct. 1. — Luz Wendy T. Noble