WebClick Tracer

July 13, 2024

BSP likely to take it slow on rate cuts amid global pressures – analysts

The Bangko Sentral ng Pilipinas (BSP) is expected to approach rate cuts cautiously, potentially beginning next month, amidst considerations of the exchange rate and external economic conditions.

Bank of the Philippine Islands (BPI) indicated in recent analysis that the BSP’s Monetary Board may lower the 6.5 percent target reverse repurchase (RRP) or policy rate on August 15, following a decrease in June inflation to 3.7 percent from May’s 3.9 percent.

“While the BSP may initiate rate cuts in August, aggressive reductions are unlikely due to domestic and international constraints. This move could lead to a steeper yield curve, impacting short-term rates more significantly than long-term ones,” BPI noted.

BSP Governor Eli M. Remolona Jr. has hinted at potential cuts totaling 50 basis points (bps) this year, potentially commencing in August and continuing by October 17 or December 19.

Meanwhile, Metrobank Research projects BSP rate reductions starting in the fourth quarter, with a projected 25 bps cut on October 17 and another 25 bps on December 19, aimed at stabilizing the peso currently trading around P58 against the US dollar.

BPI economists anticipate an August rate cut, suggesting that inflation may have peaked in June. Metrobank analysts caution that an August cut hinges on July inflation surprising to the downside compared to June levels.

An August rate cut may weaken the peso, given the narrower interest rate differential between US Federal Reserve and BSP rates. This could increase exchange rate volatility but appears to be a risk the BSP is willing to manage.

The central bank’s analysis indicates manageable inflation impacts from exchange rate movements, with concerns emerging only if inflation targets are jeopardized.

“However, the potential for a weaker peso remains a limiting factor likely to prevent aggressive rate cuts, especially given the country’s current account deficit,” BPI added.

Looking forward, BPI foresees continued peso weakness in the short term, influenced by narrowing interest rate differentials. It anticipates a potential recovery by year-end if the Federal Reserve opts for rate cuts, although gains for the peso are expected to be modest compared to other emerging market currencies, reflecting the substantial Philippine current account deficit.