A WEAK PESO may cause the Bangko Sentral ng Pilipinas (BSP) to delay the start of its easing cycle, with a 50-basis-point (bp) cut in October at the earliest, Fitch Solutions’ unit BMI said.
“Given that the peso has come under heavy pressure due to fluctuations in US interest rate expectations, this will act as a constraint to preemptive loosening,” it said in a commentary.
The peso has been trading at the P58-per-dollar range since May, its first time sinking to the level since November 2022.
On Monday, the peso closed at P58.65 against the greenback, weakening by four centavos from its P58.61 finish on Friday.
BMI said currency market volatility is the “biggest barrier” to the BSP beginning its easing cycle.
It noted that the BSP would be “extremely mindful” of any easing because this might affect the peso.
“This feeds into our expectations for the BSP to embark on its first cut only in October at the earliest. The monetary cycles of both the Philippines and the Fed tend to track each other closely,” BMI said.
The Monetary Board is scheduled to hold policy meetings on Aug. 15, Oct. 17 and Dec. 19.
BSP Governor Eli M. Remolona, Jr. has signaled the central bank is on track to cut rates at its Aug. 15 meeting.
“In our view, such an early cut remains out of the question even if price pressures ease substantially,” BMI said.
Mr. Remolona has said the BSP does not need to wait for the Fed before it cuts rates because its monetary decisions are independent of the US central bank.
Markets now expect a 64% chance of the Fed cutting interest rates in September, unchanged from before the data, as well as another cut in December, Reuters reported after the release of better-than-expected US inflation data.
Fed officials earlier signaled monetary easing as late as December and priced in just one rate cut this year.
BMI said it only expects the BSP to cut after the US central bank begins its own easing cycle. It sees the Fed cutting rates by a total of 50 bps this year starting in September, with the BSP expected to follow suit.
“We are revising our policy rate forecast to incorporate just one 50-bp cut in October at the earliest,” it said.
“In sum, we are expecting a 50 bps worth of cuts in 2024 and another 150 bps in 2025.”
However, BMI still noted the possibility of an earlier cut amid latest signals of the BSP.
“With the governor keeping the door open for monetary loosening in August, this suggests that they are pretty unfazed by weakness in the currency,” it said. “As such, the BSP could very well surprise us with a cut next month if inflationary pressures recede faster than we currently expect.”
June inflation likely settled at 3.9%, according to the median estimate of a BusinessWorld poll of 14 analysts.
If realized, this would match the 3.9% print in May. It would also mark the seventh straight month inflation was within the central bank’s 2-4% target.
The BSP expects full-year inflation to average 3.3%. — Luisa Maria Jacinta C. Jocson
