The peso could fall to P59:$1 if the BSP cuts early

By means of Luisa Maria Jacinta C. Jocson, News reporter

The PESO could cross the P59 per dollar level if the Philippine central bank cuts rates as early as August, according to Fitch Solutions unit BMI.

“In our view, we believe such an early cut remains out of the question even if price pressures ease,” BMI Asia country risk analyst Shi Cheng Low said in a webinar on Tuesday.

If the Bangko Sentral ng Pilipinas (BSP) cuts in August, Mr. Low said it would mean the central bank is “practically signaling that they are giving up currency stability in exchange for economic growth.”

A rate cut in August could also cause the peso to cross the P59 per dollar level and possibly even reach the P60 mark, he added.

The peso had hit a low of P59 against the dollar in October 2022, prompting BSP intervention in the foreign exchange markets and an interest rate hike.

BMI said the biggest obstacle to the BSP’s monetary easing is currency stability.

“The Philippine peso has emerged as one of the worst performing currencies in the region. As such, the BSP will be keenly aware of a pre-emptive return to policy easing for fear of exacerbating the weakness of the already weak peso,” Mr Low said.

The peso has been trading at a range of P58 per dollar since May. The central bank has attributed the peso’s weakness to demand for the dollar as a safe haven amid geopolitical tensions and aggressive signals from the US Federal Reserve.

“I think currency stability will be the biggest constraint going forward and that will depend on whether the BSP is willing to give that up to support the economy, at least this year,” Mr Low said.

BMI expects that the BSP will not start cutting rates until October this year, with a total of 50 basis points (bps) for 2024 and 150 basis points in 2025.

BSP Governor Eli M. Remolona, ​​Jr. has said the central bank could start its easing cycle in August. While the BSP keeps an eye on the Fed’s moves, it has maintained that its moves are independent of the US central bank.

“With the governor keeping the door open for monetary easing in August, policymakers are holding a TueFfiery view from us. They indicate that the weakness of the peso would not be the decisive factor for policy easing,” Low said.

“As such, the BSP could very well surprise us with a cut next month if inflationary pressures ease faster than we currently expect,” he added.

Mr Low cited recent measures that would help further tame the situationFsuch as the recent executive order lowering the tariffFfs on rice imports.

“Our estimates show that the rate cut could reduce headline inflation by as much as 1.3 percentage points in the coming months. However, this will take some time before its full impact is reflected in rice prices,” he said.

President Ferdinand R. Marcos, Jr. issued an order last month to reduce rice import tariffsFfs to 15% from 35% until 2028 in an effort to drive down staple grain prices.

Meanwhile, Mr Low also noted that the impact of an August rate cut on the economy would be visible in the fourth quarter.

“If there is a rate cut in August, the monetary transmission will take place and we will see some form of it or an impact of it materialize, perhaps in the fourth quarter, and we will see investment pick up again, which of course supports the economy . the Philippine economy.”

“But let’s just say that if they make cuts in October, it may be a little too late for their impact to be seen at least this year,” he added.

The economy grew by 5.7% in the United States Ffirst quarter. The government is targeting growth of 6 to 7% this year.

Second-quarter gross domestic product data will be released on August 8.