BMI: Fewer BSP rate cuts on tap in 2024
The Bangko Sentral ng Pilipinas (BSP) will likely cut rates later this year—and by less—as a weak peso is expected to act as a constraint to preemptive loosening of monetary policy, BMI Research said.
In a commentary sent to journalists on Monday, the unit of the Fitch Group said it now expects the BSP to reduce its key rate by a total of 50 basis points (bps) this year beginning from September, fewer than its previous projection of a cumulative 75-bp cut.
The revision was in line with BMI’s updated rate outlook on the US Federal Reserve, which it expects to also start cutting rates in September for a total of 50 bps in 2024. That said, BMI is one of the institutions that expect the BSP to stay in lockstep with the Fed to avoid putting too much pressure on the peso.
“Broadly speaking, we are not drastically changing our view. We still think that the Bank’s next move will be a cut and it will materialize only when the Fed embarks on policy easing of its own,” BMI said.
“The Bank’s recent dovishness provides us with confidence in our view,” it added.
The Monetary Board (MB), the highest policymaking body of the BSP, left the benchmark rate unchanged at 6.5 percent for the sixth straight meeting.
More scope
But Governor Eli Remolona Jr. struck a more dovish tone and said there’s a chance that the central bank might cut the policy rate by a total of 50 bps this year—with the first 25-bp cut possibly in August and ahead of the Fed.
Such a tone was striking in the MB’s statement after the policy meeting, which now stressed that “an improvement in the inflation outlook would allow more scope to consider a less restrictive monetary policy stance.” It’s a dovishness that defied a weak peso that had weakened by over 5 percent year-to-date.
Big barrier
For BMI, the volatile peso is “the biggest barrier to monetary loosening”.
“Constant fluctuations in US interest rate expectations have led to much volatility in many emerging market currencies. And the peso is no exception,” BMI said.
“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. 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,” it added.
