Fed cuts to reinforce BSP easing cycle

By means of Luisa Maria Jacinta C. Jocson, Reporter

The latest signals of policy easing from the US Federal Reserve could have the Bangko Sentral ng Pilipinas worried (BSP) more conFidentity to continueAccording to analysts, the country will follow its own interest rate cutting cycle.

Jonathan L. Ravelas, senior professional services advisor FIrm Reyes Tacandong & Co. said the start of the Fed’s easing cycle would “open doors” for the BSP to continue cutting rates.

“If Philippine inflation remains lower, a cut in December is likely,” Ravelas said in a Viber message.

Federal Reserve Chairman Jerome H. Powell on Friday endorsed an imminent start of interest rate cuts, saying further cooling in the labor market would not be welcome and expressing confidence thatFAccording to Reuters, the interest rate is within range of the US central bank’s target of 2%.

“The time has come for policy adjustment,” Powell said in a highly anticipated speech at the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming. “The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”

Analysts and financial markets expect the Fed to deliver on its promises Ffirst rate cut at the September 17-18 policy meeting, a position reinforced after the July central bank meeting read that a “large majority” of policymakers agreed with the policy easingwould probably start next month.

Leonardo A. Lanzona, an economics professor at Ateneo de Manila University, said Fed rate cuts are already widely expected as the U.S.Flation has stabilized.

“The slowdown has resulted in a slowdown in the US economy. The BSP therefore anticipated this eventual rate cut and proceeded to lower the policy rate in consultation with the Fed to prevent any negative e-rates.Ffects in the Philippines,” he said in an email.

“Given these factors, the eventual Fed rate cut will no longer have any impact on the Philippine economy.”

The Monetary Board this month cut the target reverse repurchase rate by 25 basis points (bps) to 6.25%, from a 17-year high of 6.5%.

Mr Lanzona said markets were likely already factoring in the Fed’s expected moves, as the BSP had already cut spending before the US central bank.

“Whatever consequences it could have had, it was already incorporated into business decisions, and so whatever we are experiencing now will continue as the lower rates have already been enforced by the BSP,” he said.

“Although short-term investments may be a bit of an advantageFAffected, long-term investments will not change as lower interest rates in both countries have already been rationally factored into their forecasts.”

Michael L. Ricafort, chief economist of Rizal Commercial Banking Corp., said the local policy rate could fall to a level of 4-5% between next year and 2026 if the Fed starts cutting rates.

“Local interest rate benchmarks would fall by another 50 to 100 basis points or even more from current levels between 2025 and 2026 as the Fed cuts rates by a total of about 225 basis points between 2024 and 2026 (which could be matched locally by the BSP) based on the latest Fed dot plot,” he said.

BSP Governor Eli M. Remolona Jr. has flagged the possibility of another 25 basis point cut in the fourth quarter. The Monetary Board has two more interest rate meetings this year, on October 17 and December 19.

Meanwhile, Mr. Lanzona noted that the risks to the inFThe prospects in the Philippines could pose a risk to the BSP’s policy cuts.

“The inFThis is essentially a supply-side phenomenon, and policy rates are not intended to stop itFbut merely eliminating inFlationary expectations,” he said.

“So because the government has failed to eFeffectively implement a strong productivity plan, especially in agricultureFThis will remain a threat that could weaken the currency.”

The BSP expects headline inflation to average 3.4% this year and 3.1% in 2025.FInflation accelerated to a nine-month high of 4.4% in July.

“Additionally, the government’s continued pump-priming policy further contributes to the risks of burglaryFlat. This means that BSP’s interest rate reduction is unwise,” said Mr Lanzona.

He added that the BSP should continue to monitor Fed rates to support the peso. “It should keep its rate very close to, if not higher than, the Fed rate.”

Mr Ricafort also said there must be a “healthy” interest rate differential to stabilize the exchange rate.

The Fed Funds rate is currently between 5.25 and 5.5%.

“Further cuts in local policy rates are possible if the peso exchange rate is relatively stable or stronger, global crude oil prices are still at 2.5-year lows, and if data inFInflation will remain within the BSP inflation target of 2-4% in the coming months,” Mr Ricafort added.

The peso closed at P56.333 per dollar on Thursday, strengthening by 16.7 centavos from its P56.5 Foff on Wednesday. The local currency has previously traded at the P57-58 level in recent months. — with input from Reuters