BSP to only cut once this year in Oct – BMI

Bangko Sentral ng Pilipinas

THE Bangko Sentral ng Pilipinas (BSP) will likely start lowering interest rates after the US Federal Reserve and not earlier as signaled given the peso's weakness, a Fitch Group unit said.

"We still think that the bank's (BSP) next move will be a cut, and it will materialize only when the Fed embarks on policy easing of its own," BMI Country Risk & Industry Research said in a June 28 report that was released on Monday.

BMI said that it now expects the US central bank to start cutting interest rates in September by 50 basis points (bps).

"[T]he BSP will adjust its monetary policy in concert," it added. "Whereas we were previously expecting 75 bps worth of cuts starting from September, we now reckon only 50 bps of cuts starting in October."

While the central bank's dovishness due to improvements in the inflation outlook was noted, BMI said there were "signs of restraint" in that the policymaking Monetary Board had cited the need for some caution given potential spillovers.

And while BSP Governor Eli Remolona Jr. has indicated that an August easing was possible, BMI said that "such ... remains out of the question even if price pressures ease substantially."

"[T]he biggest barrier to monetary loosening is still currency stability," it said.

"The Philippines peso has emerged as one of the poorest performing currencies in the region, second only to the Japanese yen in the quarter-to-date," it added.

BMI stated that frequent changes in US interest rate expectations have caused significant volatility in many emerging market currencies, including the peso.

Consequently, the BSP will be very cautious about a premature easing, as this could further weaken the peso.

"This feeds into our expectations for the BSP to embark on its first cut only in October at the earliest," BMI said, adding that "the monetary cycles of both the Philippines and the Fed tend to track each other closely."

It also pointed out that with economic growth likely to hit 6.2 percent this year — below the pre-pandemic average of 6.6 percent for 2015–2019 — and investments still subdued amid high interest rates, "we think that the bank will want to cut at the earliest possible time to help spur investment activity and push growth back to trend."

With monetary authorities apparently unfazed by the peso's weakness given Remolona's latest statements, "the BSP could very well surprise us with a cut next next month if inflationary pressures recede faster than we currently expect."

Following last week's policy meeting, the BSP chief said that two rate cuts totaling 50 bps were likely, beginning in the third quarter.

The Monetary Board next meets on August 15. Two more — October 17 and December 19 — are scheduled for the rest of the year.

The Fed's next policy meetings, meanwhile, will be on July 30 to 31, September 17-18, November 6-7, and December 17-18. It has signaled just one rate cut this year, instead of the three indicated in March.

The likelihood of a September cut has dropped given a still strong US economy and above-target inflation, but is still the most favored by most analysts. Some, however, have said that the US central bank could hold off from easing until December.

The BSP's benchmark rate, which has remained unchanged since October last year, is currently at an over 17-year high of 6.5 percent, the result of 450 basis points of increases beginning May 2022 after inflation started surging in the wake of Russia's invasion of Ukraine.

The Monetary Board last week lowered its risk-adjusted forecast for 2024 to 3.1 percent from 3.8 percent. That for 2025 was also reduced to 3.1 percent from 3.7 percent.

The baseline forecasts for 2024 and 2025 were also trimmed, to 3.3 percent from 3.5 percent and 3.1 percent from 3.3 percent, respectively.

With inflation currently near the upper end of the BSP's 2.0- to 4.0-percent target and with the impact of lower rice tariffs seen taking time to be fully felt, BMI said that the Monetary Board was likely to again keep interest rates unchanged next month.