Philippine Central Bank Eyes Rate Cuts Ahead of Federal Reserve, Peso Under Pressure

Philippine central bank governor Eli Remolona has indicated that the Bangko Sentral ng Pilipinas (BSP) may cut its benchmark interest rate before the Federal Reserve begins its easing cycle. This decision could exert further pressure on the peso against the US dollar.

The peso has already weakened past 58 per dollar, marking its lowest level in 19 months, and has fallen 5.8% against the dollar so far in 2024. The benchmark policy rate currently stands at a high of 6.50%.

Remolona suggested that the BSP could reduce rates by 25 basis points as early as August and by another 25 basis points in the fourth quarter. He expressed confidence in managing inflation pressures, stating that the central bank is prepared to act when the peso is under stress but does not intervene in the foreign exchange market on a daily basis.

Why this matters: The potential rate cuts by the Philippine central bank have significant implications for the country's economy and currency. If not managed carefully, it could lead to further depreciation of the peso and impact the country's economic stability.

Finance Secretary Ralph Recto's comments on the possibility of 150 basis points of rate cuts over the next two years were dismissed by Remolona as "too aggressive." He noted that such significant cuts would only be considered if there was a risk of a hard landing for the economy.

The Philippine economy grew by 5.7% in the first quarter of 2024, which was below expectations but showed a slight improvement from the last three months of 2023. This growth trajectory, coupled with the peso's depreciation, highlights the challenges faced by the BSP in balancing monetary policy and economic stability.

Remolona emphasized the BSP's cautious approach, stating, "We intervene to express our own view where the peso should be going." This stance reflects the central bank's strategy of not engaging in daily interventions in the foreign exchange market.

The BSP's policy direction comes amid expectations that US interest rates will remain higher for longer. Despite the peso's recent performance, the central bank remains focused on ensuring inflation settles within its 2% to 4% comfort range this year.

To recap, the BSP's potential rate cuts ahead of the Federal Reserve's easing cycle reflect a strategic move to manage inflation and economic growth. However, this decision also highlights the delicate balance the central bank must maintain in the face of a weakening peso and external economic pressures.

Key Takeaways

• Philippine central bank may cut interest rates before Federal Reserve's easing cycle.
• Peso has weakened past 58 per dollar, its lowest level in 19 months.
• Benchmark policy rate stands at 6.50%, with potential 25-basis-point cuts in August and Q4.
• Rate cuts aim to manage inflation and economic growth, but may lead to peso depreciation.
• BSP maintains cautious approach, intervening in foreign exchange market only when necessary.