BSP Preview: Dovish signal points to easing on the table

A dovish tone from the central bank chief and a string of economic data this month all point to a policy rate cut next week.

After two consecutive cuts, Metrobank forecasts that the Bangko Sentral ng Pilipinas (BSP) will further reduce the reverse repurchase (RRP) rate in the next meeting. This aligns with dovish signals from Governor Eli Remolona.

Inflation dips below target

Headline inflation slowed further, hitting a near six-year low in July at 0.9% year-on-year. Year-to-date, headline print is now at 1.7%, below the 2.0% lower bound of the government’s full-year inflation target.

Although inflation is expected to quicken in September due to low base effects and other upside risks, the full-year average is seen remaining within the 2%-3% target range.

Source: Philippine Statistics Authority

Monetary push for growth

Gross domestic product (GDP) growth for the second quarter settled at 5.5%, bringing the first-half average to 5.4%. This suggests that while consumption is starting to pick up, consumers and businesses remain cautious on spending due to looming global uncertainties.

A more accommodative financial environment therefore is seen to help stimulate consumption and investments especially, as expensive imports and weaker export demand are expected to exert some downward pressure on growth.

Signals all over

Below-target inflation, alongside the current growth momentum, builds the case for a policy rate cut as early as the next meeting. In his interviews, Governor Remolona continues to signal a higher possibility of a rate cut in August, potentially one of the two more rate cuts the BSP is currently expecting for the rest of the year.

Our Call

Metrobank forecasts the BSP’s monetary board to cut the policy rate by 25 basis points (bps) next week. This narrows the interest rate differential (IRD) with the Federal Reserve (Fed) to 50 bps for a few weeks until the rate cut that we expect from the Fed in September.

Read more: BSP and Fed Update: Moving to their own rhythm

Current USD/PHP level which remains within the 56- and 57-level signals that peso has space to absorb a narrower IRD. Moreover, a weak dollar environment is expected to partially offset its impact.

(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.)

MARIAN MONETTE FLORENDO is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She holds a double undergraduate degree in Mathematics and Education from Ateneo de Naga University and a Master of Arts degree in Economics from the University of the Philippines Diliman. Her academic background is in Mathematics and Economics. She loves solving puzzles and watching mystery movies.