In a significant policy shift, the Philippine central bank, Bangko Sentral ng Pilipinas (BSP), announced a 25 basis point reduction in its target reverse repurchase rate, bringing it down to 6.25%. This move, decided during Thursday's monetary policy meeting, marks the first rate cut since November 2020, reflecting a response to moderating inflation trends and a stable economic outlook.

The central bank also adjusted the interest rates on the overnight deposit and lending facilities to 5.75% and 6.75%, respectively. BSP Governor Eli Remolona highlighted that despite an inflation uptick in July, the overall inflation trajectory is expected to fall within the government's target range of 2-4% by 2024.

"The risk-adjusted inflation forecasts for 2024 and 2025 are now at 3.3% and 2.9%, respectively," Remolona stated, underscoring that the inflation outlook continues to lean toward the downside for the next two years, with a slight upward risk for 2026. The primary downside risks include lower import tariffs on rice, while potential upside risks could stem from higher electricity rates and external factors.

Despite tight financial conditions, the BSP noted that domestic demand remains robust, supported by solid second-quarter GDP growth and a declining unemployment rate. Public investment, easing price pressures, and strong employment conditions are expected to sustain economic activity moving forward.

Remolona explained that the current macroeconomic environment justifies a shift to a less restrictive monetary policy stance, as inflation trends align with targets. However, he cautioned that the central bank remains vigilant of any lingering risks that could drive prices higher.

This rate cut reflects the BSP's delicate balancing act as it seeks to support economic growth while ensuring inflation remains under control, signaling a careful approach to future monetary policy adjustments.