BSP rate cut forecast pushed back to October in Philippines

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BMI Country Risk and Industry Research believes the Bangko Sentral ng Pilipinas (BSP) will slash policy rates by 50 basis points starting in October, pushing back its previous forecast of rate cuts in September.

Following the BSP's policy decision to keep interest rates steady last week, the research arm of the Fitch Group in a report said that a rate cut from the BSP would only materialize when the US Federal Reserve starts its own policy easing.

'We now think that (the Fed) will only cut by 50 basis points in 2024, starting in September and the BSP will adjust its monetary policy in concert,' it said.

'Whereas we were previously expecting 75 basis points worth of cuts starting from September, we now reckon only 50 basis points of cuts starting in October,' it said.

Some economists are talking about a possible rate cut in August.

While the BSP will want to cut interest rates at the earliest time possible to help spur investment activity and support economic growth, BMI said that the biggest barrier to policy easing is still currency stability.

'The 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 said.

According to BMI, constant fluctuations in expectations regarding US interest rates have led to much volatility in several emerging market currencies, including the peso.

'As such, the BSP will be extremely mindful of a preemptive return to monetary loosening for fear of exacerbating weakness in the already weak peso,' BMI said.

The peso has been above the 58 to $1 level since late May. The local currency closed at 58.65 to $1 on Monday, down by four centavos from its previous finish of 58.61 to $1.

Year to date, the peso has depreciated by 5.6 percent from its end-2023 close of 55.37 to $1. The local unit hit a 20-month low of 58.86 to $1 on June 26.BMI also expects the country's monetary settings will be kept unchanged next month, even though BSP Governor Eli Remolona Jr. has hinted at the possibility of an August cut.

'In our view, such an early cut remains out of the question even if price pressures ease substantially. At 3.9 percent in April, inflation is currently very near the BSP's upper bound target of four percent,' it said.

BMI also noted that while cutting rice tariff rates to 15 percent from 35 percent could help lower headline inflation by up to 1.3 percentage points over the coming months, it would still take some time before its full impact feed through to rice prices.

In a separate report, BMI said the reduced tariff rates for rice imports could cause import volumes to increase, probably benefitting traders in Vietnam and Thailand.

'In the near term, we expect that the reduction in rice import tariffs could see domestic rice price pressures in the Philippines ease,' it said.

'In the immediate term, however, the reduction will not have a noticeable impact on domestic prices due to the feed through time lag,' it added.