Peso seen to fall if rates cut too soon

Peso seen to fall if rates cut too soon

It is still going to be difficult for the Bangko Sentral ng Pilipinas (BSP) to cut interest rates ahead of the US Federal Reserve unless it is prepared to let the peso weaken significantly, Dutch financial giant ING Bank said.

Robert Carnell, Asia-Pacific head of research at ING, said a rate cut in the fourth quarter would be better than the August easing hinted by BSP Governor Eli Remolona Jr. But Carnell said that, at this point, the latter scenario is more likely to happen, adding that Remolona seemed open to tolerate the peso’s weakness.

READ: ‘Twin deficits’ seen as persistent drag to peso

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“The peso weakened slightly in the immediate aftermath of the BSP decision and accompanying comments—but not as much as might have been expected, and it recovered fairly quickly,” the ING economist said.

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“BSP has been intervening to support the currency in recent weeks, though the governor seems to accept that the direction of travel for the currency is skewed,” he added.

Last week, the Monetary Board, the highest policymaking body of the BSP, left the benchmark rate unchanged at 6.5 percent for the sixth straight meeting on expectations that the recent decision to further slash import duties on rice would significantly help ease inflation in the next months.

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Remolona also struck a more dovish tone and said there’s a chance that the central bank might cut the policy rate by a total of 50 basis points (bps) this year—with the first 25-bp cut possibly in August and ahead of the Fed.

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There are some market watchers who pointed out that the BSP cannot ease ahead of the Fed. This is because the peso may come under pressure if local yields become less attractive to foreign investments seeking high returns while interest rates are still high elsewhere, especially in the US, which is considered a safe haven by investors.

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READ: BMI: Fewer BSP rate cuts on tap in 2024

A sharp currency slump is seen to risk fanning inflation by making imports more expensive. It can also bloat the peso value of foreign debts held by the government and Philippine companies.

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But Remolona was unfazed, arguing that the pass-through effect of a weak peso on inflation “is not very large.” He also said the BSP has ample reserves to prevent sharp volatility of the peso.

For ING’s Carnell, it is important for the BSP to avoid too much depreciation of the peso as it would import inflation and undo any benefits of the tariff reduction.

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“Most central banks nursing a weak currency wouldn’t go out of their way to provide markets with new reasons to sell, but the BSP doesn’t seem that bothered,” he said.

TAGS: Interest Rates, Peso

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