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BSP has room to ease before Fed

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Bangko Sentral ng Pilipinas main office in Manila — CRAG

By Luisa Maria Jacinta C. Jocson, Reporter

THE BANGKO Sentral ng Pilipinas (BSP) still has room to cut rates before the US Federal Reserve, analysts said, but warned of such a move’s impact on the peso.

Last week, BSP Governor Eli M. Remolona, Jr. signaled that the central bank could start rate cuts as early as August, even as he expects the US central bank to begin easing in September.

“It is a positive signal, indicating that the BSP believes the Philippine economy is well-positioned to handle a slight divergence from the Fed’s monetary policy stance,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in a Viber message.

Last week, the Monetary Board (MB) maintained its target reverse repurchase (RRP) rate at a 17-year high of 6.5% for a fifth straight meeting. However, Mr. Remolona said the BSP may cut rates in August, possibly by 25 basis points (bps).

“Such a scenario is not impossible if domestic inflation remains under control, but it risks both higher imported inflation down the road and capital flight, especially in times of high geopolitical tensions,” Makoto Tsuchiya, economist at Oxford Economics, said in a note.   

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said that the possibility of the BSP cutting ahead of the Fed cannot be ruled out.

“If local inflation dynamics improve so dramatically that it outweighs the exchange rate pass through impact of a series of reserve requirement ratio (RRR) and RRP cuts, the BSP MB may have room to cut ahead of the Federal Open Market Committee (FOMC),” Mr. Neri said in a Viber message.

Mr. Roces noted that the BSP 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.”

The economy grew by 5.7% in the first quarter, better than 5.5% in the previous quarter but slower than the 6.4% expansion a year earlier.

The government is targeting 6-7% growth for the full year.

IMPACT ON PESOHowever, Mr. Roces said if the BSP cuts rates ahead of the Fed, the challenge is “to carefully balance the benefits of lower rates with the risks of capital outflows and currency depreciation.”

“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,” he said.

“This could lead to capital outflows and depreciation pressure on the peso because of a narrower interest rate differential. 2022 comes to mind, when the Fed hiked and we didn’t and sent the peso to near P60,” he added.

Mr. Remolona has said he is not worried about cutting ahead of the Fed and its potential impact on the peso, noting that there would only be a bit of pressure on the currency.

Mr. Roces said Mr. Remolona’s statement indicates that the BSP sees the impact on the peso as “manageable.”

“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,” he added.

The peso closed at P57.62 against the dollar on Friday, depreciating by 15.5 centavos from its P57.465 finish on Thursday.

Week on week, the peso also weakened by 20 centavos from its P57.42 finish on May 10. The peso sank to the P57 level in mid-April, mainly driven by the conflict in the Middle East.

“If forthcoming US inflation and growth data increasingly improve the odds of Fed cuts, BSP can also cut ahead of the Fed without necessarily causing too much exchange market pressure,” BPI’s Mr. Neri said.

On the other hand, some analysts said that the BSP is still unlikely to cut before the Fed.

“We continue to expect the BSP to only cut after the Fed. Our baseline scenario is for the Fed to begin its easing cycle in the fourth quarter of 2024, starting with a 25-bp rate cut,” HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay said in a report.

HSBC sees the BSP cutting rates by 25 bps in the fourth quarter to end the year with a benchmark rate of 6.25%.

In a commentary, Nomura Global Markets Research said a cut by BSP in August is “still unlikely,” citing persistent inflation and the current account deficit.

Nomura Global Markets said this suggests a need for BSP to “keep interest rate differentials supportive of the currency and keep imported inflation in check.”

The BSP last week reiterated its outlook that inflation could temporarily overshoot the 2-4% target range from May to July due to positive base effects.

“Overall, we do not believe BSP turned decisively dovish (last week), much less opened the door to rate cuts in the near term. We would put more weight on the hawkish policy statement,” Nomura said.

Mr. Remolona had said that he was “less hawkish” but still noted that risks to the inflation outlook remain on the upside.

Nomura expects the BSP to cut rates by a total of 50 bps this year, starting with a 25-bp cut in October.

RRR CUTLast week, Mr. Remolona also said that he is seeking to reduce the RRR to 5% from the current 9.5%.

The BSP reduced the ratio for big banks and nonbank financial institutions with quasi-banking functions by 250 bps to 9.5% in June 2023.

The central bank has brought down the RRR for universal and commercial banks to a single-digit level from a high of 20% in 2018.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that the BSP may reduce its RRR once it also starts policy easing.

“Any further cut in RRR could infuse more liquidity into the financial system in terms of more loanable funds for banks that could also reduce intermediation costs and help further spur loan or credit growth and demand, which, in turn, would help further stimulate more business and economic activities,” he said in a Viber message.

Mr. Ricafort said that a cut of one percentage point could infuse roughly P146 billion into the banking system as this would mean more loanable funds by the largest banks.

The RRR is the percentage of bank deposits and deposit substitute liabilities that banks cannot lend out and must set aside in deposits with the BSP.

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