The Peso will not derail the rate cuts in the fourth quarter

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

According to Governor Eli M. Remolona Jr., the Philippine central bank would cut its key interest rate as early as the fourth quarter, despite the peso’s decline to its lowest level in 17 months.

The Monetary Board could still cut policy rates in the fourth quarter, he told a newsletterFon Wednesday. “If it is worse than we think, it can be postponed to the Ffirst quarter of 2025.”

The peso and other regional currencies have weakened in recent days as markets gambled on the chances of early interest rate cuts around the world.

The peso devalued past the closely watched level of P57 per dollar on Tuesday before closing at P57 Flat — the weakest since P57,375 on November 22, 2022 — due to expectations that the US Federal Reserve would postpone interest rate cuts.

On Wednesday, the rate continued to weaken, closing at P57.18 against the dollar.

Mr. Remolona said the depreciation of the peso has not been large enough to aFinfluence inflation expectations and monetary policy.

“I wouldn’t say it’s underperforming,” he said. “I would say it adapts to some events. Initially, the currency weakened, along with other emerging market currencies, by the way, as a result of what is going on in the Middle East.”

Markets were roiled after Iran launched hundreds of drones and missiles against Israel this weekend in retaliation for an alleged airstrike by Israel on the Iranian consulate in Syria earlier this month.

But the head of the Bangko Sentral ng Pilipinas (BSP) sees no threat from the scamFlic.

“In fact, Brent oil and Dubai oil prices initially rose but have now fallen again,” he said. “So the feeling from the oil market is that hostilities will not escalate. I hope it stays that way.”

Brent futures for June were down 0.44% or 40 cents at $89.62 a barrel at 0632 GMT, while US crude futures for May were down 0.56% or 48 cents at $84.88 a barrel , Reuters reported.

Mr. Remolona said the recent decline in the peso was due to signals of delays in Fed rate cuts.

“There is a delay as to when the FOMC (Federal Open Market Committee) will ease up, in the eyes of the market,” he said. “That has led to a weakening of other currencies against the US dollar.”

“It’s not about a weak peso, it’s about a strong dollar. Unless the movements are very sharp, we tend to let the adjustment take place,” he added.

Federal Reserve Chairman Jerome H. Powell has said they may have to keep “restrictive” policy rates in place for longer as yields persist.Flat.

NO RATE INCREASE
Markets initially expected the US central bank to start cutting rates in June, but this could be delayed until September.

“Easing won’t happen until perhaps late in the third quarter when it comes to the FOMC,” Mr. Remolona said. “Enter the USFThe inflation rate has remained very persistent.”

The Fed raised the fund rate by 525 basis points (bps) to 5.25-5.5% from March 2022 to July 2023.

Mr Remolona said there would be no rate increases this year unless there was a rate hikeFThe situation is accelerating faster than expected.

Inflation accelerated for the second month in a row to 3.7% in March, compared to 3.4% a month earlier. The BSP expects inFthis year an average of 3.8%.

“What’s scary is the unanchoring,” Mr. Remolona said. “When we see that the markets and households are starting to believe in itFIf interest rates will rise sharply, we should consider an interest rate increase.”

‘But other than that we are in a tight spot now. At 6.5% it is already tight. It is already doing its job,” he added.

The central bank held firm for a fourth straight meeting in March, holding its benchmark interest rate steady at a nearly 17-year high of 6.5%. The Monetary Board has increased borrowing costs by 450 basis points between May 2022 and October 2023.

Meanwhile, Fitch Solutions unit BMI said the peso could continue to depreciate over the next six months to two years due to weak economic fundamentals.

“Over the longer term, the currency will continue on its depreciating trend and weaken to P57.20 per dollar by the end of 2025,” the report said.

Elevated insideFThis measure will dampen the currency’s appreciation, the report said. “Emerging markets such as the Philippines generally see faster price increases compared to advanced economies.”

“Higher inflation in the Philippines could lead to a steady decline in the value of the peso to maintain the country’s international competitiveness,” it added.

BMI said it expects the peso to fall a lot short-term volatility due to the constant repricing of interest rate expectations in the US.

“However, we believe this will eventually disappear once the US Federal Reserve makes its first rate cut in July,” the report said. “This means that the Philippine peso will remain somewhat stable at P56.50 per dollar [by yearend].”

Philippine economic managers expect the peso to trade from P55 to P57 this year and from P55 to P58 from 2025 to 2028.