The Bangko Sentral ng Pilipinas is expected to match any move by the US Federal Reserve to cut interest rates in the coming months, a scenario that will be positive for the local financial markets, including the peso, an economist said Monday.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said any Fed rate cut might take place if inflation in the world’s largest economy hits the target of 2 percent.
“If the US CPI/inflation goes to the Fed’s target of 2 percent later this year, at the earliest, then this could eventually justify and usher the start of Fed rate cuts especially into 2024 that could also be matched locally and would become a major positive lead/catalyst for the global and local financial markets for the coming months,” Ricafort said in a report.
The next local policy meeting is scheduled in September 2023, and Ricafort said local monetary authorities could match the Fed’s move to maintain healthy interest rate differentials to support the stability of the foreign exchange rate, import prices and overall inflation.
“[A] pause on local policy rates [is] also a possibility, especially if the peso exchange rate is relatively stable,” he said.
The peso gained P0.59 to close at 56.18 on Aug. 18, a day after the Bangko Sentral ng Pilipinas kept the local policy rates unchanged, but signaled a hawkish pause and readiness to tighten monetary policy if needed and if upside inflation risks happen.
Ricafort earlier said one factor that contributed to the peso’s weakness was the “tail end” of the seasonal increase in OFW remittances for tuition and other school opening-related payments, followed by the seasonal increase in importation in the third quarter.
The interagency Development Budget Coordinating Committee in June revised down the peso-dollar exchange rate assumption for 2023 to a range of 54 to 57 and 53 to 57 in the medium term.
The peso fell to an all-time low of 59 per US dollar in October 2022 amid expectations that the Fed by that time would raise interest rates. The peso ended 2022 at 55.755, losing P4.756 compared to 50.999 against the greenback on the last trading day of 2021.
BSP Governor Eli Remolona said in an interview with CNBC Friday there is still room for local monetary authorities to increase the prevailing interest rates, if needed, without leading to economic contraction.
“I think we have room to hike without contracting the economy… The neutral rate of interest is closer to 4 percent in real terms. If our projections are right, we will be at 3.25 percent in real terms for neutral interest rates .. but we have room to hike,” he said, referring to the different between the borrowing rate and the interest rate.
“We think we will be within the striking distance of the target range. We think we will be within the target range by the end of this year and certainly by 2024 and 2025. That is the way we are looking at this,” he said.