The BSP has room to ease ahead of the Fed

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

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

Last week, BSP Governor Eli M. Remolona Jr. indicated that the central bank could start cutting rates as early as August, while he expects the US central bank to start easing in September.

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

Last week, the Monetary Board (MB) kept its target reverse repurchase (RRP) rate at a 17-year high of 6.5% for the fifth time in a row. However, Mr Remolona said the BSP could 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 and capital flight over time, especially at times of high geopolitical tensions,” Makoto Tsuchiya, an economist at Oxford Economics, said in a note.

Emilio S. Neri Jr., chief economist of the Bank of the Philippine Islands, said the possibility of the BSP cutting spending faster than the Fed cannot be ruled out.

“If local inflation dynamics improve so dramatically that they outweigh the exchange rate effects of a series of reserve requirement (RRR) and RRP cuts, the BSP MB may have room to advance at 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 before the Fed “suggests that the BSP is either moreFwhich are identical to the stability of the domestic economy and its anchoringFexpectations, or whether the country may be concerned about the potential impact of prolonged elevated interest rates on the economy.”

The economy grew by 5.7% in the United States Ffirst quarter, better than 5.5% in the previous quarter, but slower than the 6.4% growth a year earlier.

The government is targeting growth of 6 to 7% for the entire year.

IMPACT ON PESO
However, Mr. Roces said that if the BSP cuts rates before the Fed, the challenge will be to “carefully balance the benefits.”Fit is of lower rates with the risks capital outFlows and depreciation of the currency.”

“If a central bank cuts rates while other major central banks maintain higher rates, this could make the currency less attractive to foreign investors seeking higher rates,” he said.

“This could lead to capital outflows and pressure on the peso due to lower interest ratesFferential. I think of 2022, when the Fed hiked rates and we didn’t, sending the peso to almost P60,” he added.

Mr. Remolona has said he is not concerned about Fed cuts and their potential impact on the peso, noting there would be only a little pressure on the currency.

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

“This view could be based on factors such as the Philippines’ strong economic fundamentals, that the current depreciation of the peso could only be temporary, adequate foreign exchange reserves, and the potential of the interest rate cut to stimulate domestic growth and attract foreign investment to be drawn in the longer term. term,” he added.

The peso closed at P57.62 against the dollar on Friday, falling 15.5 centavos from its P57.465 Foff on Thursday.

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

“If upcoming US inflation and growth data make the likelihood of Fed cuts increasingly likely, the BSP could also cut ahead of the Fed without necessarily putting too much pressure on the currency market,” BPI’s Mr Neri said.

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

“We continue to expect the BSP to cut spending only after the Fed. Our base case is that the Fed begins its easing cycle in the fourth quarter of 2024, starting with a 25 basis point rate cut,” HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay said in a report.

HSBC expects the BSP to cut rates by 25 basis points in the fourth quarter to end the year with a benchmark rate of 6.25%.

In a commentary, Nomura Global Markets Research said a BSP cut in August is “still unlikely,” citing continuedFlation and the current accountFicit.

Nomura Global Markets said this indicates that BSP “rates diFferentials that support the coin and remain importedFunder control.”

The BSP last week reiterated its expectation that inflation could temporarily rise above the 2-4% target between May and July due to positive fundamentals.Ffects.

“Overall, we do not believe the BSP has made a decisive dovish move last week, much less opened the door for near-term rate cuts. We would give more weight to the aggressive policy statement,” Nomura said.

Mr Remolona had said he was “less aggressive” but still noted there were risks to theFThe outlook remains positive.

Nomura expects the BSP to cut rates by a total of 50 basis points this year, starting with a 25 basis point cut in October.

RRR CUTTING
Last week, Mr Remolona also said he wants to reduce the RRR from the current 9.5% to 5%.

The BSP lowered the ratio for large banks and non-banks Ffinancial institutions with quasi-bank functions by 250 basis points to 9.5% in June 2023.

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

Michael L. Ricafort, chief economist of Rizal Commercial Banking Corp., said the BSP may reduce its reserve requirements once policy is also eased.

“Any further reduction in reserve requirements could bring more liquidity to the economy Ffinancial system in terms of more loanable funds for banks, which could also reduce intermediation costs and further stimulate growth and demand for loans or credits, which in turn would help further stimulate more business and economic activities,” said him in a Viber message.

Mr. Ricafort said a one-percentage-point cut could pour roughly $146 billion into the banking system because it would mean the biggest banks could lend more loanable funds.

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