Fed cut gives BSP more room to ease

The Bangko Sentral ng Pilipinas now has more room to continue its policy easing to support economic growth after the US Federal Reserve delivered a much-awaited cut on Wednesday but may stay cautious amid lingering inflation risks.

“The Fed decision is but one additional factor for BSP’s policy calculus… Last night’s decision and potential subsequent easing would afford BSP more space to cut rates further should growth remain in need of support,” Metropolitan Bank & Trust Co. (Metrobank) Chief Economist Nicholas Antonio T. Mapa said in a Viber message.

Speaking at the Philippine Economic Briefing in Cebu held on Thursday, BSP Deputy Governor Zeno R. Abenoja said the central bank will continue to monitor both inflation and growth.

“This year, we think inflation will average below the target. The target is 2% up to 4%. We may be averaging at around 1.7%… But for the next two years, 2026, 2027, inflation will be back in the middle of the target, around 3.3% to 3.4%, and because of that, we may be near the appropriate interest rates for policy. So, we are moving towards that, what we call the ‘sweet spot’ where interest rates are at the right level to promote growth but at the same time control inflation,” he said.

“What are we looking at? We are looking at future inflation or underlying inflation pressures. We are looking at growth numbers. If growth numbers continue to be resilient, we don’t have to do big adjustments, but we will continue to do baby steps. We are looking at inflation expectations… So, for the rest of the year, we still have two policy meetings. It is possible that there could be some policy actions, but we will take it one meeting at a time.”

Last month, the BSP lowered borrowing costs by 25 basis points (bps) for a third straight meeting to bring the policy rate to 5%. It has now reduced benchmark interest rates by a cumulative 150 bps since it began its rate cut cycle in August 2024.

BSP Governor Eli M. Remolona, Jr. has left the door open to one more reduction within this year to support the economy if needed, which would likely mark the end of its easing cycle.

He also said that they see “more significant risks to the inflation outlook than the output outlook,” even as they expect prices to be manageable.

The Monetary Board’s last two meetings this year are scheduled for Oct. 9 and Dec. 11.

Meanwhile, at Wednesday’s meeting, the Fed lowered its policy rate by 25 bps to a range of 4%-4.25%, its first cut since December, and signaled a gradual easing cycle in response to mounting labor market concerns, Reuters reported. This brought its cumulative cuts since September 2024 to 125 bps.

At the same time, Fed Chair Jerome H. Powell highlighted “a challenging situation” for policymakers, noting that risks to inflation were tilted to the upside and risks to employment to the downside.

The comments dampened market optimism despite a much hoped-for dovish shift after recent data that showed unemployment climbing to 4.3% in August and payrolls growing far less than expected. A steep downward revision to benchmark jobs figures for the year through March also recently added weight to the view that the labor market is losing steam, bolstering the case for multiple rate cuts ahead.

The US central bank’s release on Wednesday of updated quarterly economic projections, including rate forecasts issued in a chart known as the “dot plot,” reflected expectations of more easing this year when compared to the “dots” from the June meeting, with 50 bps in cuts seen before yearend.

At the same time, the Fed’s projections still put inflation ending this year at 3%, well above the central bank’s 2% target, while its projection for economic growth was slightly higher at 1.6% versus 1.4%.

Peso suport

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the BSP could match the Fed’s future cuts to maintain a “healthy” rate differential, but only if the data show a weakening economy and manageable inflation. The US central bank’s latest move put the difference between its target rate and the BSP’s to 75 bps.

Mr. Remolona has said that the rate differential’s potential impact on the peso does not worry them as much anymore as the local unit has performed well against the dollar, even as this margin has been below 100 bps for some time.

Metrobank’s Mr. Mapa said a wider spread between the BSP and the Fed’s key rates could attract foreign inflows, which would prop up the peso against the dollar and help limit imported inflation.

“The Fed’s easing gives BSP more room to cut without risking sharp peso depreciation… If BSP cuts again while the Fed continues easing, the differential will likely remain within a safe range, especially if both move in tandem. However, if BSP moves faster than the Fed, peso depreciation risks could rise. This is why the BSP is careful with its succeeding steps and continues to stress their data dependency,” Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines, said in a Viber message.

He said that the peso could weaken if the BSP eases “too aggressively,” which could then cause import costs to go up and stoke prices.

“Secondly, while inflation is currently below target, risks remain from typhoon-related supply shocks, higher rice tariffs, and energy prices. The BSP must avoid over-easing if these materialize,” Mr. Asuncion said.

“Lastly, US trade policy uncertainty and geopolitical tensions could affect global capital flows. A sudden reversal in Fed policy or a spike in US inflation could force BSP to pause or even reverse easing.”

Philippine National Bank economist Alvin Joseph A. Arogo said in an e-mail that they do not expect the BSP to move in lockstep with the Fed, but a wider gap between rates could provide a “margin of safety” for the peso.

The BSP is more focused on domestic economic indicators, particularly inflation and GDP (gross domestic product) growth, when calibrating its monetary policy,” he said.

On Thursday, the peso closed at PHP 57.06 per dollar, weakening by 17 centavos from its PHP 56.89 finish on Wednesday.

Year to date, the local unit is up by 78.5 centavos from its PHP 57.845 close on Dec. 27, 2024.

“At this point, it appears the BSP won’t move as fast or as deep as the Fed in cutting rates, so a widening policy rate differential between the US and the Philippines will further strengthen the peso. It is also worth noting that a wide policy rate differential gives the BSP significant scope for lowering rates to boost the economy while ensuring the peso’s stability,” China Bank Capital Corp. Managing Director Juan Paolo E. Colet said in a Viber message.

Prospects of more BSP and Fed rate cuts will be positive for domestic bond yields and the stock market, he said, adding these could push the Philippine Stock Exchange index (PSEi) to the 6,500-6,600 levels in the coming months.

The PSEi went up by 22.96 points or 0.37% to close at 6,233.62 on Thursday.

“We expect a downward bias for yields, with any upward correction to be limited as investors would prefer locking in yields at this point,” a bond trader added.

Regina Capital Development Corp. Head of Sales Luis A. Limlingan said in a Viber message that the US central bank’s decision had no immediate impact on Philippine markets as the cut has already been priced in by investors.

“Moving forward, more economic data such as CPI (consumer price index) and employment data, may impact the timing of the Fed and BSP cuts,” he said. — Katherine K. Chan with a report from Aaron Michael C. Sy