Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said if the US Federal Reserve will cut its interest rates this year, then the BSP will do the same and cut its own benchmark rate, currently paused at 6.25 percent. “If the US cuts then we have room to cut, I think,” he told Bloomberg TV on Friday, May 19, a day before the BSP’s Monetary Board retreated from its nine straight rate hikes. “If it’s clear that the path of the US policy rate is on the way down, then clearly rate cuts will be on horizon as well for the Philippines. By the way, the markets and what the Fed is saying are actually not consistent. If you look at the markets it is expecting a cut but if you listen to the Fed, they’re not,” he told CNBC also on Friday. However, Medalla said a US Fed rate reduction seems unlikely to happen in 2023 but more possible in 2024, in contrast to market expectations that a rate cut is coming by end-year. “I’ll be a little bit more cautious. I think the market is underestimating the determination of the Fed to bring down inflation. So, it may be much later, maybe next year. (As such) the markets are over optimistic about the cuts,” the BSP chief said to Bloomberg. The BSP is very cautious about the timing of its own rate cut. Medalla said on May 18, which was when the Monetary Board decided to pause, that they could probably “hold” for at least two to three more meetings or until September as they watch local inflation come down further to below the four percent target by the end of the third quarter. There is reluctance to reduce the key rate on the part of the BSP. “The only reason we’re reluctant to cut is (because) much of the market thinks that current policy rate differential between the Philippines and the US is already on the narrow side,” said Medalla. The market prefers or is more comfortable with a 100 basis points (bps) to 125 bps rate differential between the BSP and US Fed rate. The central bank is wary of the risk of the peso depreciating too much again if the policy rate differential are put into question. In a separate interview with CNBC, Medalla said it is the market that determines an acceptable policy rate differential. “(That is) what differential will result in a peso that’s not depreciating too much. Right now, our sense is that the market is looking it at 100 bps to 125 bps. Of course we will try to change the mind of the market, that we can live with a smaller one. I think that’s the next dialogue with the market. But as it is, we will be a bit too reckless if we ignore the market on this regard,” he said. At the moment though, at 6.25 percent BSP rate, Medalla said they are in a “tenable, sustainable” policy rate differential. Medalla has said previously that a policy rate cut is possible this year but that will depend on the exchange rate situation. “We have to think of the implications on the peso-dollar exchange rate,” he said. Exchange rate intervention and raising BSP policy rates are two primary monetary policy measures that the central bank has done to stabilize the peso-US dollar rates, currently at the P55-56 level. The BSP key rate should at least be 100 bps higher than the US interest rates to keep the exchange rate less volatile. The BSP uses a flexible and free-floating exchange rate policy which is market-determined.