The BSP could cut policy rates before the Fed

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

THE Bangko Sentral ng Pilipinas (BSP) may cut its policy rate in the presence of the US central bank despite a volatile peso, Governor Eli M. ReMolona, ​​Jr. said Tuesday.

“It is possible that the Fed could make cuts in July,” he told reporters in mixed English and Filipino. “There are analyzes that say that July… we can go Ffirst, but it depends on whether their inflation is persistent. They are not allowed to cut.”

The BSP chief previously said the central bank could cut interest rates in August at the earliest.

The Monetary Board held its policy rate steady at a 17-year high of 6.5% last month. The central bank has raised borrowing costs by 450 basis points (bps) between May 2022 and October 2023 to keep interest rates in check.Flat.

Mr Remolona said the peso is not depreciating because it is weak, but mainly because the dollar is strong.

“The story is not about the weak peso,” he said. “The real story is about a strong dollar. Every time there is tension, every time there is uncertainty, money flows into the US dollar and the dollar becomes stronger against other currencies.”

The peso closed three centavos weaker against the dollar at P58.71 on Tuesday, according to data from the Bankers Association of the Philippines posted on its website. On May 21, the rate fell to the level of P58 per dollar for the FFirst time since November 2022.

The dollar is also strengthening due to aggressive signals from the US Federal Reserve, the BSP chief said.

“The Fed has said that US policy rates will remain high for longer. But the longer part keeps shifting, so that creates some uncertainty,” he added.

The BSP is not targeting a specific level for the peso, Mr. Remolona said.

“We’re not too concerned about the level itself,” he said. “We’re more concerned about how it gets to where it’s going. We try to steer the market by occasionally giving our own vision of where things should go.”

The Development Budget Coordination Committee (DBCC) expects the peso to fluctuate between P55 and P57 per dollar this year.

The central bank has not intervened in the currency market on a daily basis, but does so from time to time to “give our own view on where the peso should go.”

“We don’t intervene every day,” Mr Remolona said. “We intervene if necessary. And if we say we have to, then the currency is under pressure. Under stress means we find some dysfunction in the market.”

“Sometimes the peso moves sharply in the wrong direction, and then we can intervene,” he added.

Diwa C. Guinigundo, country analyst at GlobalSource Partners, said comments from central bank officials are affecting the peso’s performance.

“Market observers and traders attribute the recent weakness of the Philippine peso precisely to this less aggressive statement on monetary policy outside of the Monetary Board’s formal press statement, which was unequivocally hawkish,” he said in a note.

“Immediately, the peso responded by falling to P58.27. This was not intended to be a temporary weakness, but it is now heralding a depreciating trend beyond P58 per dollar,” added Mr. Guinigundo, a former central bank deputy governor.

He said the peso’s continued weakness could increase inflationary pressures.

‘TOO AGGRESSIVE’
“If peso weakness remains this high for a year, and with an exchange rate pass-through of 0.08 percentage points (ppt) for each peso depreciation, we are looking at an additional inflation of 0.24 ppt,” he said.

“This means that the market may even be better able to adjust to the central bank’s forward guidance than to the actual stance of monetary policy, as defined by the policy rate,” he added.

Mr Remolona said a rate cut of as much as 150 basis points over the next two years could be too aggressive and require a “hard landing”.

“Given the current trajectory (of economic growth), it could be too aggressive,” he said.

He said the BSP could cut the policy rate by 50 basis points this year and another 100 basis points next year, but there would have to be “a risk of a hard landing” for this to happen.

“While curbing inflation, we do not want unnecessary loss of production,” he said. “Although sometimes you cannot prevent some output from being lost, because our calculations are not always precise. But if the loss of production will be significant, we will have to respond accordingly.”

Treasury Secretary Ralph G. Recto previously said the Monetary Board could cut the policy rate by as much as 150 basis points over the next two years.

The Philippine economy grew 5.7% in the first quarter, below the government’s target of 6-7% this year.

Meanwhile, Mr Remolona said the central bank is conducting a “post-mortem” examination following its investigation into so-called ghost employees. ‘We’re doing an autopsy on this. What else can we do to prevent this in the future?”

The central bank is pursuing disciplinary proceedings against six employees among certain members of the Monetary Board. Four of these were “ghost employees,” while the other two were identified as supervisors.

The investigation was launched in October after the Office of the General Counsel received reports about the workers.

“I was stunned,” Mr. Remolona said. “I didn’t think this kind of thing would happen at BSP. We really need a good reputation and enough credibility to make monetary policy work.”

The Monetary Board is the policy-making body of the central bank headed by the governor. The members are Mr. Recto, Benjamin E. Diokno, V. Bruce J. Tolentino, Anita Linda R. Aquino, Romeo L. Bernardo and Rosalia V. de Leon.