Fed cut gives BSP more space to ease

The US Federal Reserve’s long-awaited rate cut paves the way for the Bangko Sentral ng Pilipinas (BSP) to continue its own easing path, analysts said.

“The new monetary stance of the US, highly anticipated by now, could in fact provide the BSP more space to ease, expand domestic liquidity, and stimulate growth,” Diwa C. Guinigundo, country analyst for the Philippines of GlobalSource Partners, said in a Viber message.

The US central bank on Wednesday kicked off an anticipated series of interest rate cuts with a larger-than-usual half-percentage-point reduction that Federal Reserve Chair Jerome H. Powell said was meant to show policy makers’ commitment to sustaining a low unemployment rate now that inflation has eased, Reuters reported.

“We made a good strong start, and I am very pleased that we did,” Mr. Powell said at a press conference after the Fed, noting its increased confidence that the country’s bout with high inflation was over, reduced its benchmark policy rate by 50 basis points (bps) to the 4.75%-5% range. “The logic of this both from an economic standpoint and from a risk management standpoint was clear.”

In addition to approving the half-percentage-point cut on Wednesday, Fed policymakers projected the benchmark interest rate would fall by another half of a percentage point by the end of this year, a full-percentage point next year, and half of a percentage point in 2026.

“With the Fed cutting by 50 bps, (the BSP) has more than enough space to cut the target reverse repurchase (RRP) by 25 bps in October with September inflation possibly dipping to 2.3%,” Metropolitan Bank & Trust Co. (Metrobank) Chief Economist Nicholas Antonio T. Mapa said on X.

Last month, the Monetary Board reduced the RRP rate by 25 bps to 6.25% from the over-17-year high of 6.5%. This was the first time that the BSP reduced rates in close to four years.

BSP Governor Eli M. Remolona, Jr. has said that the central bank can deliver another 25-bp cut in the fourth quarter. The Monetary Board’s remaining meetings this year are scheduled for Oct. 17 and Dec. 19.

Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp., said the BSP would likely cut by at least 25 bps at its meeting next month.

“I expect another 25-bp cut in the next meeting (at least) because if the Fed hikes another 50 bps, the BSP has to match the magnitude of the cut in order to tame the expected strength in Asian currencies due to the Fed’s cutting cycle,” he said in an e-mail.

Mr. Ella said that if the Fed continues its pace of 50-bp sized cuts, the BSP may need to follow suit.

The Fed had kept its policy rate in the 5.25%-5.5% range since last July, when it ended an 18-month rate-hike campaign that was meant to control a surge in inflation, which soared in 2022 to a 40-year high, Reuters reported.

Rate futures traders moved to price in even more easing than projected by the Fed, with the policy rate now expected to be in the 4%-4.25% range by end of this year.

Mr. Mapa said the “door is wide open” for the BSP to deploy further policy easing in October and reserve requirement ratio (RRR) cuts in the near term.

He noted that if the BSP would keep rates steady in October, the Fed would still have two meetings in between the Monetary Board’s own December meeting. “Makes perfect sense for BSP to front load cuts,” he added.

The Federal Open Market Committee’s (FOMC) last two meetings this year are set for Nov. 6-7 and Dec. 17-18.

Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said that the BSP has room to reduce the benchmark rate two more times this year, but forecasts just one more rate cut.

“Most activity indicators remain robust even if policy rates are close to 6% and the Monetary Board needs to reduce the RRR meaningfully and build up its gross international reserve (GIR) buffer while it still has the space to do so,” he said.

“Related to GIR accumulation, the BSP can probably become as aggressive as the FOMC in the cuts if our GIR is brought up closer to the Philippine economy’s USD 130-billion external debt,” he added.

External debt hit a record USD 130.182 billion at the end of June, up by 10.4% from  a year ago.

Gross dollar reserves inched up by 0.18% to USD 106.92 billion as of end-August from USD 106.74 billion as of end-July. This was the highest level of dollar reserves in 29 months or since the USD 107.3 billion in March 2022.

“The BSP hasn’t been able to build up its GIR significantly since the rate hike cycle in mid-2022. The beginning of the US easing cycle opens up the window as long as we have a comfortable differential between Philippine and US policy rates,” Mr. Neri said.

He also noted that latest macroeconomic data show “robust economic activity,” citing easing inflation, strong employment figures and double-digit lending growth.

Headline inflation slowed to 3.3% in August from a nine-month high of 4.4% in July.

“The current Monetary Board doesn’t seem to be rushing to cut rates as it also needs to proactively give room for the planned ‘substantial reduction’ in our RRR and will need to rebuild a bigger GIR buffer given the rapid expansion in the country’s external debt,” Mr. Neri added.

Mr. Guinigundo also noted the risk of further rate cuts as well as RRR reductions.

“The only challenge I could foresee is the possible resurgence of price pressures from higher liquidity, especially when RRR is slashed by a few hundred basis points,” he added.

Mr. Remolona this week said that the BSP plans to “substantially” reduce the reserve requirement this year.

In June 2023, the central bank reduced the ratio for big banks and nonbank financial institutions with quasi-banking functions by 250 bps to 9.5%.

The BSP chief earlier said that the RRR should be slashed to as low as 5%. – Luisa Maria Jacinta C. Jocson, Reporter, with Reuters