In the aftermath of the midterm election that showed surprising upsets—and despite the prevailing uncertainty surrounding the United States’ (US) tariffs—the domestic market is gearing up for a possible interest rate cut by the Bangko Sentral ng Pilipinas (BSP).

Talks going around the market suggest there’s enough room for the BSP to bring down its key interest rate by 25 basis points (bps), which would narrow the interest rate differential to 75 bps, in its policy meeting this coming June.

Yes, Virginia, the BSP will be ahead of the curve relative to the US Federal Reserve, which has placed rate reductions on hold, waiting to see how the tariff war pans out. As US Fed Chair Jerome Powell puts it: “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”

Amid this uncertainty, the domestic market, however, is upbeat on the looming BSP rate cut, buoyed by the relatively peaceful—except in certain areas—holding of the midterm election.

And this is despite the disappointing performance of the domestic economy, which fell short of both market and government expectations—growing at a slower pace of 5.4 percent year-on-year, a difference of 0.5 percent.

Although profit-taking dominated the equities market on Wednesday, May 14, the currency market remained relatively calm, with the peso trading within the ₱55.75 to ₱55.85 range.

It’s been heard along the market corridors that the prospect of a BSP rate cut scheduled for June 19—the birthday of our National Hero, Jose Rizal—is “fueling the calmness” in the market.

Narrowing the interest rate differential, in normal circumstances, triggers currency depreciation. This time around, however, the market expectation is that the peso will continue to trade at the ₱55-to-a -dollar level, even if the Monetary Board narrows the interest differential to 75 bps from the current, more comfortable, and acceptable level of one percentage point (ppt).

“They [the monetary authorities] can afford to trim down the interest differential. Though the sensitivity of the peso-dollar [rate] is a variable, the currency moving close to ₱56 while balancing inflation is a main consideration,” explained a market source.

As I write this, the peso opened at ₱55.80, traded at a high of ₱55.75 from Wednesday’s closing rate of ₱55.85—showing a slight gain.

The possible rate cut would allow the national government to tap the domestic market for much-needed funds at a lower cost, instead of looking at external financing.

From what I’ve heard in the alleys of both the Bureau of the Treasury (BTr) and the Department of Finance (DOF), the government is behind its programmed borrowing. “It’s close to or slightly above five percent rather than mid-five percent. Half a percentage point impacts on the debt service.”

Additionally, the DOF has to raise more funds to cover the ₱60 billion drawn from the coffers of the Philippine Health Insurance Corp. (PhilHealth). This is on the expectation of a favorable decision from the Supreme Court regarding the petition assailing the transfer of PhilHealth funds to the national treasury.

Let’s see how these market developments will unravel.

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