By Luisa Maria Jacinta C. Jocson, Reporter

THE PHILIPPINE central bank still has room to continue cutting interest rates, its top official said.

“At this point, I can tell you we’re still in restrictive territory compared to what we think the ‘Goldilocks’ rate is. So, there’s still some room to ease,” Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. said at a Rotary Club briefing on Thursday.

The Monetary Board slashed borrowing costs by a total of 75 basis points (bps) last year, bringing the target reverse repurchase rate to 5.75%. It delivered 25 bps worth of rate cuts at each of its August, October and December meetings.

“I think we’re in good shape. We’re well within the target range (for inflation). So, this time we don’t have to explain to the President monetary policy because we’ve achieved the government’s target of the inflation rate,” Mr. Remolona said.

Headline inflation accelerated to 2.9% in December, bringing full-year average inflation to 3.2%. This matched the BSP’s own forecast for the year and was well within the 2-4% target band.

“That’s where we stand and I think we’re in good shape and we’re better prepared to face the challenges ahead of us,” Mr. Remolona said.

“I would say that we’ve done the hard work. And as a result of that, we are what I would call firmer footing in the economy.”

However, the BSP chief said that it is still “too soon to declare victory.”

“We still have work to do. We’re facing new kinds of challenges, a very unusual kind of uncertainty. And so, we have to be a little more cautious than before,” he added.

Mr. Remolona noted the potential challenges arising from the uncertainty surrounding US President-elect Donald J. Trump’s policies.

“He has threatened tariffs, he has threatened to deport millions of people from the United States. There is likely to be some retaliation to the tariffs. There is likely to be a significant impact on the labor force in the United States, and it will also affect our own economy.”

Among Mr. Trump’s proposals are a 10% universal tariff and a 60% tariff on Chinese goods.

“With regard to tariffs, I would say we’re in better shape than many other countries because in our trade, a big chunk of our trade is services trade, business process outsourcing (BPOs) and remittances. That’s not so easy to impose tariffs on. Hopefully, our services trade will remain intact,” the BSP chief said.

Mr. Remolona also noted the potential impact of the US Federal Reserve’s own easing cycle. The Fed projects two rate cuts for 2025.

“The expectation is the next time the Fed will cut, if it does cut, will be after the middle of the year,” he said. “We don’t decide on monetary policy just on what the Fed does. We look at our own data, and what the Fed does is just another piece of data.”

EASING TO SLOW?
Meanwhile, Fitch Solutions’ unit BMI said that the BSP’s pace of easing could slow this year amid expectations of fewer rate cuts by the Fed.

“The BSP is still on track to deliver another 25-bp cut at its next meeting. But broadly speaking we think that the pace of easing will slow against the backdrop of a more hawkish Fed,” it said in a separate report.

“To be clear, we think that the BSP will frontload interest rate cuts to support the economy. But its hands are tied when it comes to the extent of its loosening cycle.”

BMI noted that policy makers’ views “have grown considerably less dovish.”

It cited Mr. Remolona’s signals that cutting rates by 100 bps this year may be “too much.”

“The BSP’s hawkish tilt is not at all surprising. Central banks around the world have similarly signaled more restraint in monetary easing going forward, against the backdrop of policy uncertainty in the US,” BMI said.

It now expects the central bank to deliver 75-bp reductions this year to end the key rate at 5% by end-2025.  BMI previously forecasted the benchmark rate to be cut to 4.5% by yearend.

“This would represent 50 bps fewer rate cuts compared to our previous projection,” it said.

Rate cuts are also projected to be spaced out throughout the year, with 50 bps in the first half and 25 bps in the latter part of the year, BMI said.

“The main constraint is the Fed which has clearly signaled its appetite for fewer cuts this year. The Fed has dialed back on its own projections for interest rate cuts following Trump’s return to the White House.”

“Our team believes that monetary settings in the US will remain restrictive and are expecting just 100 bps of cuts in 2025 compared to 150 bps previously,” BMI added.

It also noted the impact on the local currency.

“Admittedly, the peso has since recovered slightly to P58 (per dollar), but it would have been weaker had the BSP not intervened to curb excess volatility in the market… The bigger picture is that the BSP does not have the space to cut much more than the Fed if it hopes to preserve external stability,” it added.

Last year, the peso sank to the record-low P59 level thrice amid a strong dollar due to bets on slower Fed cuts.

“Our current forecasts are quite conservative, with risks skewed towards additional cuts. Although we see it as a tail risk, the imposition of 10-20% blanket tariffs by the US on all goods could further reduce the Philippines’ real GDP (gross domestic product) growth,” BMI said.

“The BSP will prioritize the economy in such a scenario even if it comes at the expense of currency stability.”

However, the BSP does not need to match the US central bank in its easing cycle.

“We think that this time it will be similar, with the BSP enacting the bulk of its policy rate cuts in the first half and the Fed in the second half.”

BMI said the Monetary Board is on track to deliver another 25-bp cut at its next meeting on Feb. 20. It is the only rate-setting meeting slated for the first quarter.

“Frontloading cuts in the first quarter will only materially impact growth later in the second half 2025 due to policy lags… But given the poor economic showing in the third quarter, policy makers will seek to unwind monetary policy settings at the earliest possible time,” it added.

The Philippines’ gross domestic product slowed to 5.2% in the third quarter, slowing from 6.4% in the second quarter and 6% a year ago. It was also the weakest growth in five quarters.

Meanwhile, BMI said the central bank has “very little to worry about when it comes to inflation.”

“Admittedly, we expect price pressures to pick up over the coming months. But broadly speaking, it will remain within the BSP’s targeted range of 2-4% in 2025 barring external shocks.”

BMI expects inflation to average 3.3% this year, in line with the central bank’s projection.

THE BANGKO SENTRAL ng Pilipinas (BSP) is studying the possibility of implementing a “subscription” model for small electronic fund transfers such as e-wallet payments to replace transaction fees.

“Because of what we call network externalities, there should be a subscription fee, which is fixed rather than a fee per transaction,” BSP Governor Eli M. Remolona, Jr. said at a Rotary Club briefing on Thursday.

“We’re still trying to figure out how exactly to do that. We’re talking to GCash, we’re talking to Maya, we’re talking to all the participants and we’re going to agree on something.”

The central bank earlier said it is seeking to eliminate transaction fees for person-to-person electronic fund transfers and payments to small businesses.

Since 2023, it has been encouraging banks to formalize the removal of these fees to help boost digital payments.

“As you know, the situation now is between an individual and a merchant. The merchant pays the fees. The individual doesn’t see it but it’s made part of the price that the person pays,” Mr. Remolona said.

“Between persons, between individuals, we’re thinking about making that zero. No fees between up to a certain threshold. We haven’t determined the threshold.”

However, Mr. Remolona noted that there has been a bit of pushback from banks.

“The banks complained that if you do that, the guys who are above the threshold will just divide their transaction so that they fall within the threshold. But there’s some more fundamental issue. It’s not about the fees per transaction. I think that’s the wrong model.”

In his keynote speech, Mr. Remolona said they have been working to study the best model for digital payments in order to boost financial inclusion.

“If you look at the payment system, every time you add one more participant, that’s a cost. It’s a small cost, but that extra participant adds value to the whole system. You have a bigger network of participants. That’s what we call a network externality,” he said.

“We want to try to maximize that by looking at the fee structure, rely less on fees per transaction, and rely more on subscriptions, which is kind of a fixed cost. We hope that will help us maximize network externalities in the payment system and hope that this will lead to greater financial inclusion.”

Latest data from the BSP showed the value of transactions done through automated clearing houses InstaPay and PESONet jumped by 35.2% to P15.62 trillion as of end-November from a year ago.

Digital payments made up 52.8% of the volume of retail transactions in 2023, higher than the 42.1% share in 2022.

The central bank wants online payments to make up 60-70% of the country’s total retail transaction volume by 2028, in line with the Philippine Development Plan. — Luisa Maria Jacinta C. Jocson