ECONOMISTS noted on Friday that the Bangko Sentral ng Pilipinas’ (BSP) recent move of hitting the brakes on policy rate cuts will help lessen the risk of foreign exchange-induced inflation, taking into account the“renewed” strength of the US dollar.
In a commentary on Friday, HSBC Economist for Asean Aris Dacanay explained the Central Bank’s “rationale” of pausing its easing cycle, saying it was clear that the BSP “wanted monetary policy to be flexible amidst the uncertainties in global trade.”
In particular, he noted that pausing the easing cycle “would lend support to the peso and mitigate the risk of FX-induced inflation if, say, US trade policies lead to renewed USD strength.”
exchange rate because it’s when we have
large swings that we get this inflationary
effect of the exchange rate.” — Eli M.
Remolona Jr., BSP Governor
In a televised interview on Friday, BSP Governor Eli M. Remolona Jr. said there is a possibility that the peso could fall to P60 against the US dollar.
“It is a possibility. We don’t worry too much about the number itself. We worry about large swings in the exchange rate because it’s when we have large swings that we get this inflationary effect of the exchange rate,” Remolona said.
The BSP chief explained this in the context that some of the Philippines’s imports are “invoiced in dollars.” Hence, he said, “If the swings are large enough, then we can get inflationary effects. And then we’d like to dampen those swings somehow.”
Asked about the current dynamics between the dollar and the peso, the BSP chief said, “They are driven largely by the strength of the dollar. That has been the case since the beginning of the year.”
A day after the seven-man Monetary Board of the BSP decided to keep the policy rate at 5.75 percent, some economists shifted the timing of their rate cut forecasts.
Dacanay noted that HSBC previously forecasted no cuts in the second quarter of 2025. However, it now anticipates the BSP to resume cutting policy rates during the June 2025 Monetary Board meeting.
“We expect BSP to reduce the policy rate by 25bp to 5.50 percent. We do not change our forecasts for 2H 2025,” the HSBC economist for Asean noted, adding that HSBC continues to expect a 25-bp rate cut each in August and December of this year, with the yearend policy rate settling at 5 percent.
Dacanay noted, however, that these projections rest on the assumption that the Fed will reduce its policy rate to 3.50 to 3.75 percent by yearend.
“The upside risk to our view is straightforward. Any hawkish tilt by the Fed may raise the floor of the BSP’s easing cycle. The risk of FX-induced inflation may grow, the narrower the spread between the BSP and the Fed rates is,” the HSBC economic brief read.
However, Dacanay noted, “We think caution should be warranted,” adding that if growth continues to “underperform,” there is also the risk of growth concerns outweighing concerns on foreign exchange volatility.
HSBC pointed out that the BSP may also decide to eventually cut more than the Fed to make the peso more competitive. “After all, a more competitive peso will help boost demand for goods and services exports at a time when supply chains are shifting.”
For her part, Citi Economist for the Philippines Nalin Chutchotitham said, “We revise our expectation of the next 25-bp rate cuts to April, August and December.”
Chutchotitham noted that previously, the bank expected the BSP to cut in February, June and August.
“While we think the BSP could afford to cut a total of 75bp this year, considering a high real policy rate and positive interest rate differential with the Fed, Governor Remolona’s more cautious forward guidance of a total of 50bp cut this year means a third cut still hinges on several factors besides domestic demand and inflation,” the Citi economist for the Philippines explained.
Chutchotitham said these also depend on the Fed’s rate cut timing and the US trade policy actions, which “would likely have implications for USD strength and hence some FX passthrough to inflation at the margin.”
The Philippine peso closed at P57.83 against the US dollar on Friday, February 14, 2025.
Image credits: FOOTAGELAB | DREAMSTIME.COM
