Delayed Fed cut to mess up BSP easing cycle
The Bangko Sentral ng Pilipinas (BSP) would have to slam the brakes on its easing and defend the peso once again if renewed market worries about another delay in US Federal Reserve rate cuts happen, analysts said.
Robert Dan Roces, chief economist at Security Bank, said a deferred easing by the Fed could weigh on the peso and create problems for the BSP, which already went ahead of the US central bank when it cut the local key rate last month.
This, as US labor market data scheduled to be released this week is widely projected to show gains in hiring and payrolls in August based on a Bloomberg poll of economists, something that may shake market expectations of a Fed rate reduction in September.
“If the Fed unexpectedly delays this cut, the Philippine peso could face depreciation pressure against the dollar, potentially leading to capital outflows. This scenario would present challenges for the BSP, which has already implemented a preemptive rate cut,” Roces said.
“The BSP might need to pause its easing cycle to defend the peso and manage inflation expectations,” he added.
Ruben Carlo Asuncion, chief economist at Union Bank of the Philippines, shared the same view, adding that raising rates again is already “out of the question” because it may damage the credibility of the BSP.
”I think they will stick to buying USD and smoothening USD-PHP prices in the foreign exchange market,” Asuncion said.
Mild pullback
The peso had appreciated closer to the 55-per-dollar level in the past days, tracking a regional rally after the minutes of the July meeting of the Federal Open Market Committee (FOMC) showed a broad agreement that a rate cut in September “would likely be appropriate.”
And Fed chair Jerome Powell doubled down on the dovish talk during his hotly anticipated Jackson Hole speech, saying that “the time has come for policy to adjust” amid a slowdown in the American job market.
As it is, the BSP already went ahead of the Fed and cut its policy rate by 25 basis points to 6.25 percent at its policy meeting on Aug. 15 on expectations that inflation resumed a downtrend last month.
Jun Neri, lead economist at Bank of the Philippine Islands, believes that the Fed won’t postpone its September easing, adding that the decision would “merely be a toss up” between a 25 or 50-bp cut.
“In the hypothetical case that… the FOMC decides to keep policy setting neutral, we see merely a mild pullback in the USD-PHP’s downtrend, if at all, as markets continue to anticipate FOMC policy reductions later in the year and in early 2025,” Neri said.
“The sharp PHP strengthening in recent weeks isn’t just about US rate cut expectations but also reflects the improving current account position of the Philippines,” he added.
