The Bangko Sentral ng Pilipinas (BSP) could consider a “no change” monetary policy stance in December if the peso vis-à-vis the US dollar will continue to depreciate, according to analysts.

While HSBC economists said it is still possible the BSP will continue to ease the policy rate by 25 basis points (bps) next month due to a decelerating inflation path, they also see the weakening peso as a risk that may convince the Monetary Board to pause. The peso versus the greenback was trading at a three-month low this week at mid-P58.

If the local currency falls against the US dollar further because of global events including the US election, “the BSP may opt to briefly pause its easing in December to give itself some flexibility if financial markets were to remain volatile,” said HSBC analysts in a commentary on Wednesday, Nov. 6.

“Nonetheless, the BSP should eventually continue its easing cycle once the volatility subsides,” they noted, adding that the target reverse repurchase (RRP) or policy rate could settle at five percent by next year from its current level of six percent.

HSBC stressed that “there are delays to the easing cycle (but) those delays will likely be only brief.”

Bank of the Philippine Islands (BPI) lead economist Emilio S. Neri Jr. said they too see the BSP reducing the RRP rate on Dec. 19 which is the BSP’s last policy meeting for the year.

But similar with HSBC, the Ayala-led bank said the BSP will look to external developments to base its next rate decision such as the US Federal Reserve actions.  

“The recent depreciation of the peso reflects the market’s concerns over the pace of the Federal Reserve’s rate cuts and the possibility that the Fed could pause. Markets continue to expect a rate cut from the Fed in November and December, but events in the past year have shown that these expectations can quickly shift,” said Neri. 

He added that Republicans winning the presidential election in the US is generally viewed as inflationary which could “alter the Fed’s policy trajectory, potentially exerting pressure on the peso.”

“A pause in the rate cuts of the BSP continues to be possible given these uncertainties,” he said.

Meanwhile, Neri still thinks the BSP – even if it pauses in December – will resume its rate-cutting path in the coming months but does not expect any aggressive move as this “may lead to a steepening of the yield curve, with a more pronounced impact on the short end compared to the long end of the curve.”

The BSP has so far reduced the policy rate by a combined 50 bps last August and in October. The Aug. 16 rate cut was a first since November 2020.

Neri said the peso may still appreciate and strengthen by end-2024 with the previous US rate cuts. “However, despite potential gains from a Fed rate cut, the peso's appreciation might be more limited compared to other emerging market currencies as the (Philippine) economy continues to be in current account deficit territory,” he added.

As a matter of policy, the BSP’s participation in the exchange rate market is limited to tempering sharp fluctuations in the exchange rate. The BSP also does not target nor avoid any level of the peso and does not alter currency trends.

At the moment, the peso is considered weak at P58 nearing P59 versus the US dollar. It is relatively stable at the P56 to P57 level. For budgeting purposes, the government's exchange rate assumption for 2024 is P56 to P58.