Despite the central bank’s earlier pronouncements of a possible policy rate cut ahead of the US Federal Reserve (US Fed), market analysts are still betting on the Bangko Sentral ng Pilipinas (BSP) not taking any policy action before the US Fed trim its own rates.
As such, HSBC in its latest Global Research commentary said they continue to expect the BSP’s Monetary Board, its policy-making arm, will reduce the current 6.5 percent policy rate by the fourth quarter this year and not as early as August.
“Timing is everything,” said HSBC on Friday, May 24, adding that “We maintain our view that the BSP will cut just after the Fed.” HSBC noted that “signalling a rate cut ahead of the Fed will likely result in heightened depreciation pressure for the PHP (peso).” The peso has depreciated past the P58 level last May 21.
HSBC said that the shift in the signalling of BSP Governor Eli M. Remolona Jr. from hawkish to dovish or less hawkish has surprised the market because “it has been a long-held view by many, including HSBC, that the BSP would cut after the Fed.”
“But during the meeting (policy rate meeting last May 16) the Governor opened the door for rate cuts in August, implying that the BSP is mulling over whether to cut ahead of the Fed. The FX (foreign exchange) market was quick to react,” said the British bank analysts. The peso vis-à-vis the US dollar depreciated by 1.3 percent to P58.
“Like threading a needle, the door to cut policy rates ahead of the Fed is open, but the opening isn't large. Amidst uncertainty over the Fed's trajectory, risks are tilted towards the BSP shifting to a more hawkish stance to support the peso,” said HSBC.
It also noted that the “door to cut ahead would be larger if the current account deficit becomes narrower, if the real policy rate spread with the Fed widens further, or if the Fed sends dovish signals.”
“But none of these are our baseline. We continue to expect the BSP to cut after the Fed in 4Q 2024,” it added. The BSP has just two policy meetings in the fourth quarter, in October and in December.
HSBC said reducing the 6.5 percent target reverse repurchase (RRP) rate before the US Fed does will only heightened the peso depreciation.
Pressures on the exchange rate will come from: sustained positive momentum in US rates year-to-date; a limited carry buffer for the peso; less robust portfolio inflows; and an ongoing surge in FX deposits.
“With limited clarity on the Fed's rate cut trajectory, the BSP is unlikely to cut ahead of the Fed. A risk is if the BSP does not mind further PHP depreciation,” said HSBC.
During the May 16 policy rate meeting, the BSP did not move the current target RRP rate due to continued upside price pressures from higher transport fares, food and global oil prices, and power rates.
Remolona said the BSP is “somewhat less hawkish than before” and he clarified that this means the BSP is now considering an easing in the third quarter, possibly by August.
Meanwhile, Remolona said the risks to the inflation outlook continue to lean toward the upside.
For 2024, the BSP has lowered its risk-adjusted inflation forecast to 3.8 percent versus the previous April 8 policy meeting of four percent. Next year’s forecast is however the opposite, it was increased to 3.7 percent from 3.5 percent.
Remolona said the Monetary Board continues to assess that at 6.5 percent, the target RRP rate is “appropriate” and that they want to “ensure sufficiently tight monetary policy settings until inflation settles firmly within the target range” of two percent to four percent.