📷capitaleconomics
Private sector economists said on Friday, June 28, that the Bangko Sentral ng Pilipinas (BSP) may be able to cut the interest rates as planned because of expectations that rice tariff reductions will ease inflation, but the Philippine peso may discourage the BSP from doing it sooner.
Economists issued the warning after BSP Governor Eli Remolona Jr. said on Thursday that the Monetary Board’s decision to maintain the key policy rate at 6.5 percent makes the rate reduction “somewhat more likely” in August.
“Given the dovish language from the central bank, we are sticking with our view that the BSP will cut rates at its next meeting in August, with further cuts to follow. Overall, we are expecting 75 basis points of rate cuts this year, which makes us more dovish than the consensus,” Capital Economics senior Asia economist Gareth Leather said in a commentary.
“The central bank will also be paying close attention to the performance of the peso, which has been one of the worst performing currencies in Asia this year. Our view is that the peso should recover over the coming months as slower inflation and weaker growth in the US feed expectations of a rate cut by the Federal Reserve. However, a sustained fall in the currency could cause the central bank to postpone plans to loosen monetary policy,” Leather added.
Oxford Economics lead economist Sunny Liu also mentioned that BSP may decide to cut the 17-year high policy rate in the third quarter, but only if lower import taxes on rice help to sooner manage inflationary pressures.
Liu did, however, also note that the peso was depreciating, which was indicative of a gloomy market mood after the BSP said it would cut rates before the Federal Reserve.
“The reduction of tariffs for in- and out-quota imported rice set to take effect in July will push down inflation given the staple’s substantial contribution to overall inflation,” Liu said.
“Nevertheless, the exchange rate pass-through to inflation has been very limited. As a result, BSP interventions in the FX market to support peso are likely to remain infrequent and occur only when the market is under stress,” Liu added.
The Oxford Economics lead economist therefore mentioned that the BSP will probably begin reducing rates in the fourth quarter, taking inflation and foreign exchange into account.
HSBC ASEAN economist Aris Dacanay, for his part, said that August is still a little early to start easing the the rate cuts as markets expect the US Federal Reserve to cut interest rates in September.
According to Dacanay, cutting the rates after Fed in the fourth quarter of 2024 would be better when the country’s fundamentals will be better (inflation and current account).”
“We think this tariff rate cut will set the stage for the BSP’s easing cycle. The Philippines is already the only ASEAN economy whose real policy rate differential with the Fed already exceeds pre-pandemic levels. The disinflationary impulse of the tariff rate cut will widen this differential even further, giving monetary policy in the Philippines some leeway from the Fed,” Dacanay said.
“But cutting ahead of the Fed is still a tricky endeavor that requires precision and luck. The Governor said so himself by saying that ‘some caution’ will be needed when it comes to how the external economy and financial markets will react if the policy rate were to be cut. Timing will be key to ensure that the rate cut wouldn’t lead to too much volatility in the peso,” Dacanay added. (TCSP)
