Expectations that rice tariff cuts will ease inflation would allow the Bangko Sentral ng Pilipinas (BSP) to lower interest rates as planned, even as the weak peso may be a deterrent to do it sooner, according to economists.
"Given the dovish language from the central bank, we are sticking with our view that the BSP will cut rates at its next meeting in August, with further cuts to follow. Overall, we are expecting 75 basis points of rate cuts this year, which makes us more dovish than the consensus," Capital Economics senior Asia economist Gareth Leather said.
On Thursday, the Monetary Board kept the key policy rate at 6.5 percent, with BSP Governor Eli Remolona Jr. saying the anticipated cut would remain "somewhat more likely" in August.
"The central bank will also be paying close attention to the performance of the peso, which has been one of the worst performing currencies in Asia this year. Our view is that the peso should recover over the coming months as slower inflation and weaker growth in the US feed expectations of a rate cut by the Federal Reserve. However, a sustained fall in the currency could cause the central bank to postpone plans to loosen monetary policy," Leather said.
Oxford Economics lead economist Sunny Liu agrees that the BSP may consider cutting the 17-year high policy rate in the third quarter, but only if inflation pressures are controlled sooner by lower import duties on rice.
"The reduction of tariffs for in- and out-quota imported rice set to take effect in July will push down inflation given the staple’s substantial contribution to overall inflation," Liu said.
However, Liu also flagged the peso's depreciation, which reflected a bearish market sentiment following the BSP's pronouncement that it may slash rates ahead of the Fed.
"Nevertheless, the exchange rate pass-through to inflation has been very limited. As a result, BSP interventions in the FX market to support peso are likely to remain infrequent and occur only when the market is under stress," Liu noted.
As such, Liu said the BSP would more likely start cutting rates in the fourth quarter, considering both inflation and FX.
HSBC ASEAN economist Aris Dacanay noted that the BSP also lowered its headline inflation forecasts: for 2024, to 3.1 percent from 3.8 percent previously and for 2025, to a similar 3.1 percent from 3.7 percent earlier.
Dacanay said HSBC's projections had shown the year-on-year pace of consumer price hikes could even be at a lower 3.3 percent this year and 2.3 percent next year, owing to the lowered rice tariff rates.
"We think this tariff rate cut will set the stage for the BSP's easing cycle. The Philippines is already the only ASEAN economy whose real policy rate differential with the Fed already exceeds pre-pandemic levels. The disinflationary impulse of the tariff rate cut will widen this differential even further, giving monetary policy in the Philippines some leeway from the Fed," Dacanay said. Markets expect the US Federal Reserve to cut interest rates in September.
"But cutting ahead of the Fed is still a tricky endeavor that requires precision and luck. The Governor said so himself by saying that 'some caution' will be needed when it comes to how the external economy and financial markets will react if the policy rate were to be cut. Timing will be key to ensure that the rate cut wouldn't lead to too much volatility in the peso," Dacanay added.
For Dacanay, "August is still a bit too early to loosen the monetary reins," such that the BSP is expected to "cut after the Fed in the fourth quarter of 2024 when the country's fundamentals will be better (inflation and current account)."
For his part, ING Asia-Pacific regional research head Robert Carnell said: "We still feel that it is going to be difficult for the BSP to front-run rate policy with the Fed unless it is prepared to let the peso weaken significantly, and we prefer a fourth-quarter rate cut to what was proposed" by Remolona.
However, "it is clear which direction the BSP's intentions are pointing so we are prepared to be disappointed," Carnell said.