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Thursday, July 18, 2024

BSP likely to maintain rates this month to support peso

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The Bangko Sentral ng Pilipinas (BSP) is expected to keep interest rates unchanged this month to prevent the further depreciation of the peso against the US dollar, according to a bank economist.

The peso closed at 58.62 against the greenback Tuesday, still near a 19-month low, but slightly stronger than Friday’s 58.65.

Robert Dan Roces, chief economist at Security Bank Corp., said the BSP’s Monetary Board would likely hold its policy rate steady in the upcoming June 27 meeting, mostly because of the prevailing weakness of the Philippine peso and anticipations of pronounced disinflation not occurring until the end of the third quarter of 2024.

Last month, the Monetary Board kept the overnight borrowing rate steady at 6.5 percent for the fifth consecutive policy meeting since October 2023.

It also maintained the interest rates on overnight deposit and lending facilities at 6.0 percent and 7.0 percent, respectively.

“The peso’s fragility, exacerbated by external economic pressures and capital outflows, makes a compelling case for maintaining higher interest rates to support the currency and mitigate potential inflationary pressures from further depreciation,” Roces said.

“Additionally, the disinflationary trend expected towards the end of the third quarter suggests that while inflation may ease, the timeline is sufficiently distant to justify a cautious approach at this juncture,” he said.

Roces said the US Federal Reserve’s recent monetary policy pronouncements could also influence the BSP’s stance, as synchronized actions may be necessary to manage cross-border financial stability and prevent disruptive capital movements.

“Hence, a pause in rate changes would provide BSP with an opportunity to assess the impacts of global monetary shifts while addressing domestic economic vulnerabilities linked to currency performance and delayed disinflation,” he said.

Finance Secretary Ralph Recto earlier said the Monetary Board could cut interest rates by 150 bps in the next two years.

BSP Governor Eli Remolona said, however, that cutting interest rates by 150 basis points in the period would be too much, given the current economic situation.

The Philippine economy grew by 5.7 percent in the first quarter of 2024, slower than the government’s target range of 6 percent to 7 percent.

Remolona said the risks of an “aggressive” cut in interest rates is a “hard landing” or a sharp drop in economic growth.

“In taming inflation we don’t want unnecessary loss of output,” he said.

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