A slump in the peso could derail interest rate cuts

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

THE PESO WEAKNESS could be impact the Bangko Sentral ng Pilipinas (BSP) policy easing cycle. even after inflation has stabilized Within the target for the sixth month in a row in May, analysts said.

“The recent weakness of the Philippine peso poses a significant challenge for the central bank in setting its monetary policy,” Security Bank Corp. Chief Economist Robert Dan J. Roces said. in a Viber message.

In May, the peso fell to the level of P58 per dollar for the first time since November 2022. Since then, the BSP has intervened in a “modest” manner. amounts to keep the markets orderly.

The peso closed at P58.68 per dollar on Tuesday, up 11 centavos from its P58.79 finish on Monday.

“Based on the way the (peso) has performed lately, we think the (peso) movement/performance will be the BSP’s priority,” said Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion , Inc. in a Viber message.

GlobalSource country analyst and former BSP deputy governor Diwa C. Guinigundo said a weak peso could contribute to stronger price pressures. “That should make monetary policy more cautious about early easing,” he said in a Viber message.

“A devaluing peso could increaseFlationary pressure by raising import costs, potentially limiting the BSP’s ability to ease policy,” Mr. Roces added.

Headline inflation accelerated from 3.8% in April to 3.9% in May, marking the sixth month in a row that inflationFThis happened within the BSP’s target range of 2-4%.

InFInterest rates averaged 3.5% in the first five months, which is in line with the BSP’s annual forecast.

If inflation remains within target despite upside risks, Mr Guinigundo said the BSP could start cutting rates.

“This trust must be well communicated and in the right context of successFation management. That should convince the market that BSP is not only too aggressive, but also well-founded in its policy decision to ease. Speculation on the (currency) market will be minimized, if not completely dampenedFtime,” he said.

Mr. Guinigundo said the peso’s weakness can be minimized if the central bank “will continue to emphasize the encouraging trend of inflation and that average inflation will ultimately remain within target by the end of the year.”

BSP Governor Eli M. Remolona, ​​Jr. told the Reuters Global Markets Forum on Tuesday that the central bank is less aggressive than before, but remains so FI’d like to go insideFwill be around the midpoint of the 2-4% target.

He previously said the BSP could start cutting rates as early as August.

Meanwhile, Mr. Roces noted that cuts to the U.S. Federal Reserve could be risky and could also impact the peso.

“Additionally, lower interest rates before the Fed could broaden interest ratesFferential, risking capitalFlows and further devaluation of the currency,” he said.

“This scenario requires a delicate balance: while the BSP has some leeway to support domestic growth through rate cuts, it must carefully manage the longer-term consequences.Flation and investor conflictFidentity.”

Mr Remolona has said that while the BSP monitors the Fed’s moves, its own monetary decisions are independent of the US central bank. The BSP also does not need to wait for the Fed to start its own easing cycle, he said.

Meanwhile, Jonathan L. Ravelas, senior advisor at professional services firm Reyes Tacandong & Co., said inflation still remains the key indicator to watch before cutting rates.

“We need a steady decline in inflation expectations and the headline figure to see a reduction in August. The next two months are crucial to see the inflation trend moving downward,” he said in a Viber message.

The BSP said this earlierFlation could temporarily exceed the 2-4% target until July due to base eFfects.

“The timing and magnitude of the BSP rate cuts will be determined by the period of weakness in our gross domestic product (GDP) due to higher real interest rates, and Fiscal spending restrictions, followed by the US Fed timeline,” Mr. Asuncion added.

US GDP grew by 5.7% Ffirst quarter, faster than the 5.5% a quarter earlier, but slower than the 6.4% a year ago.

The government is targeting growth of 6 to 7% this year.