Delayed US Federal Reserve rate cut may complicate BSP easing cycle

The Bangko Sentral ng Pilipinas (BSP) will have to slam the brakes on its easing and defend the peso once again if another delay in US Federal Reserve rate cuts happens, analysts said.

Robert Dan Roces, chief economist at Security Bank, said a deferred easing by the Fed could weigh on the peso and create problems for the BSP, which already went ahead of the US central bank when it cut the local key rate last month.

This, as US labor market data scheduled to be released this week is widely projected to show gains in hiring and payrolls in August based on a Bloomberg poll of economists, something that may shake market expectations of a Fed rate reduction in September.

READ: ‘Hard to imagine’ no September rate cut: US Fed official

“If the Fed unexpectedly delays this cut, the Philippine peso could face depreciation pressure against the dollar, potentially leading to capital outflows. This scenario would present challenges for the BSP, which has already implemented a preemptive rate cut,” Roces said.

“The BSP might need to pause its easing cycle to defend the peso and manage inflation expectations,” he added.

Ruben Carlo Asuncion, chief economist at Union Bank of the Philippines, shared the same view, adding that raising rates again is already “out of the question” because it may damage the credibility of the BSP.

“I think they will stick to buying USD and smoothening USD-PHP prices in the foreign exchange market,” Asuncion said.

The peso had appreciated closer to the 55-per-dollar level in the past days, tracking a regional rally after the minutes of the July meeting of the Federal Open Market Committee (FOMC) showed a broad agreement that a rate cut in September “would likely be appropriate.”

As it is, the BSP already went ahead of the Fed and cut its policy rate by 25 basis points to 6.25 percent at its policy meeting on Aug. 15 on expectations that inflation resumed a downtrend last month.

Bank of the Philippine Islands lead economist Jun Neri believes the Fed will not postpone its September easing, and that it’s just a question of whether the cut will be 25 or 50 bps.

“In the hypothetical case that … the FOMC decides to keep policy setting neutral, we see merely a mild pullback in the USD-PHP’s downtrend, if at all,” Neri said. INQ