Analysts mixed on timing of BSP rate cut

MANILA, Philippines — Local and foreign analysts are divided on whether the Bangko Sentral ng Pilipinas (BSP) has room to cut ahead of the US Federal Reserve, as doing so may put pressure on the peso.

Security Bank chief economist Robert Dan Roces said the recent statement of the BSP chief on cutting rates as early as August, possibly ahead of the Fed, has raised interesting points for consideration.

Last week, right after the central bank kept the key interest rate at a 17-year high of 6.5 percent, BSP Governor Eli Remolona Jr. said the Monetary Board may cut borrowing costs as early as August while he expects the Fed to cut in September.

“The governor’s willingness to consider rate cuts ahead of the Fed suggests that the BSP is either more confident in the stability of the domestic economy and the anchoring of inflation expectations, or that it may be worried about the potential impact of prolonged elevated rates to the economy,” Roces said.

Still, Remolona’s recent statement is a positive signal to the market, which shows that the BSP sees the Philippine economy is well-positioned to handle a slight divergence from the Fed, he said.

However, beginning an easing cycle before the Fed may have an adverse impact on the peso.

“When a central bank lowers interest rates while other major central banks maintain higher rates, it can make the currency less attractive to foreign investors seeking higher yields. This could lead to capital outflows and depreciation pressure on the peso because of a narrower interest rate differential,” Roces said.

He cited the incident in 2022, when the peso reached a record-low of 59 to $1 when the US central bank hiked aggressively.

However, if the BSP chief said there would only be little pressure on the peso, then the impact may be manageable this time around.

“This view may be based on factors such as the Philippines’ strong economic fundamentals, that the peso’s current depreciation may be just temporary, adequate foreign exchange reserves, and the potential for the rate cut to stimulate domestic growth and attract foreign investment in the longer term,” Roces said.

Citi economist for the Philippines Nalin Chutchotitham said a rate cut of 25 basis points in August is possible, but it could be delayed further if the BSP sees the need to ensure inflation is firmly within the target or if the Fed pushes back its rate cut beyond the third quarter.

“Although the BSP said that peso weakness is in the ‘middle’ among regional currencies and is mainly due to dollar strength, we think the BSP would not want to cut way ahead of the Fed, as a precaution over potential negative market reactions,” she said.

Citi also expects the policy rate to fall to 5.75 percent by end-2024 and to five percent by end-2024, as inflation would stabilize after July.

Meanwhile, Aris Dacanay, economist for ASEAN at HSBC, said he expects the BSP to only cut rates after the US central bank does in the fourth quarter this year, starting with a 25-basis-point rate cut to 6.25 percent by year-end.

“Macroeconomic conditions are becoming more and more balanced and the central bank’s ‘monetary policy freedom’ from the Fed is increasing,” he said.

“Although we don’t think the level of improvement is large enough for the BSP to cut ahead of the Fed, it may be enough for the BSP to keep its monetary stance steady if another episode of Fed repricing occurs,” Dacanay added.

Euben Paracuelles, economist at Nomura, said he projects the BSP to cut by a total of 50 basis points this year, starting with a 25-bp cut in October and another in December.

He said that inflation will be above four percent from May to July before easing gradually in August. This would bring full-year inflation to 3.7 percent for 2024.

“If so, a cut in August will be too early for BSP to be confident that inflation is already well entrenched within the target,” he said.

“We also continue to believe BSP is unlikely to cut before the Fed or immediately after it, which makes a cut by BSP in August still unlikely.”