Jumbo Fed cut signals further BSP easing

The door to further ease monetary policy might have just opened for the Bangko Sentral ng Pilipinas (BSP) after the US Federal Reserve (Fed) delivered an oversized rate cut, analysts said while projecting two more reductions to the local benchmark rate before the year ends.

Robert Dan Roces, chief economist at Security Bank, said the decision of the Fed to cut rates by a half-point instead of the 25-basis point (bp) reduction penciled in by many economists “implies that the BSP has more than enough space to do more.”

“Hence, we think the BSP may cut a further 25 bps in October and December, rather than our initial projection of a final 25-bp cut in October,” Roces said, adding that the possibility of inflation slowing to below 3 percent in September could boost the confidence of the BSP to trim borrowing costs.

At its Aug. 15 meeting, the policy-making Monetary Board (MB) slashed the benchmark rate by a quarter point to 6.25 percent. That kicked off what Governor Eli Remolona Jr. had called a “calibrated” easing cycle while hinting at another cut of the same size either at the October or December meeting of the MB.

Weeks after that decision, government data showed inflation slowed to 3.3 percent in August, easing back to the 2 percent to 4 percent target range of the BSP. State statisticians had said inflation in rice prices may fall to single digits in September due to reduced tariffs on the staple grain, which can help tame the overall growth of prices in the coming months.

As it is, the slower inflation last month vindicated the central bank’s decision to trim rates ahead of the Fed. The US central bank’s benchmark rate now sits between 4.75 percent and 5 percent, with Fed policymakers thinking the key rate would fall by another 50 bps by the end of this year.

Jun Neri, lead economist at Bank of the Philippine Islands, also believed the BSP can cut the policy rate “twice more” this year and do another reduction after that, arguing that “most [economic] activity indicators remain robust” even as the local policy rates are close to 6 percent now.

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But Neri stressed that the BSP is not in a rush to ease because it still had to resume cutting banks’ reserve requirement and beef up the country’s dollar reserves so it can match the aggression of the Fed.

“The BSP can probably become as aggressive as the FOMC (Federal Open Market Committee) in the cuts if our GIR (gross international reserves) is brought up closer to the economy’s $130-billion external debt,” Neri said.

“The beginning of the US easing cycle opens up the window as long as we have a comfortable differential between [Philippine] and US policy rates,” he added.