BSP moves in lockstep with Fed

Policymakers in the Philippines and US capped the year with a quarter-point rate cut. And it looks like they are not done – more monetary easing is on the way.

The similar moves this week kept the interest rate differential, and we continue to expect the US dollar-Philippine peso (USD/PHP) pair to end the year at 58.8.

US’s uncertainties

• The US Federal Reserve (Fed) reduced the Federal Funds Target Rate (FFR) by 25 basis points (bps) to 4.25%-4.50%, as expected.
• Despite changes in the Fed’s economic outlook, we maintain our forecast of a continued easing cycle in the next two years to support the labor market and the economy.
• We expect the Fed to still deliver a total of 75 bps worth of cuts each in 2025 and the year after. This forecast already accounts for policy uncertainties following Donald Trump’s win as US president and the red sweep in Congress.

Philippines moving in tandem

• On the local front, the Bangko Sentral ng Pilipinas (BSP) reduced the Reverse Repurchase (RRP) rate by 25 bps to 5.75%.
• We expect the BSP to continue with its easing cycle in the next two years amid target-consistent inflation. The BSP is likely to match its pace of three rate cuts next year while monitoring the impact of Trump’s policies on the exchange rate.
• The BSP will remain watchful for possible episodes of extreme pressure on PHP given its implications on inflation and price expectations.
• We forecast the BSP to deliver 75 bps worth of rate cuts in each of the next two years.

Currency impact

With the BSP matching the Fed’s 25-bp cut, the interest rate differential is maintained at 125 bps. We maintain an end-2024 USD/PHP forecast of 58.8. We also expect USD/PHP to end at 57.9 by end-2025 and 56.5 by end-2026.

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(Disclaimer: This is general investment information only and does not constitute an offer or guarantee, with all investment decisions made at your own risk. The bank takes no responsibility for any potential losses.) 

Policy Rate Views

Back-to-back cuts: BSP follows Fed action

Both BSP and Fed reduced interest rates by 25 basis points.

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