Cloudy outlook on Fed cuts risk to BSP easing

A cloudy outlook on monetary policy in the United States is emerging as the biggest threat to the easing cycle of the Bangko Sentral ng Pilipinas (BSP), whose room to further cut rates may narrow if an inflation flare-up stateside would prompt the US Federal Reserve to stay patient.

In a commentary, Jun Neri, lead economist at Bank of the Philippine Islands, said a delayed rate cut in the US could put pressure on the peso—a development that may force the BSP to defer its additional easing moves to keep local yields attractive to foreign capital.

“It is still uncertain whether the Federal Reserve will cut rates this year and US inflation data in the next two months will be crucial in determining the likelihood of a Fed cut in September,” Neri said.

“There’s a risk that tariffs have not been fully passed on to consumers as many US companies imported heavily before April to cushion the impact. If inflation in the US picks up, the Fed may delay the rate cuts, which could weaken the peso and limit the BSP’s room to maneuver,” he added.

Base effects

At the same time, Neri also said the favorable base effects that have kept inflation below the official target range of 2 to 4 percent for the past four months would soon fade. This, he explained, may coincide with potential supply shocks from the typhoon season. But Neri said easing tensions in the Middle East would keep oil prices low, something that could help offset any upward price pressures.

Separately, analysts at American banking giant Citi said there were threats to the inflation outlook that must be closely monitored by the BSP.

“The BSP in a statement said that 2025 inflation would remain below target but 2026-2027 inflation will settle within target, but emerging risks to inflation need to be monitored, alongside the impact of prior policy adjustments,” Citi said in a note.