By Luisa Maria Jacinta C. Jocson, Reporter
THE US Federal Reserve’s latest pause and cautious stance could push the Bangko Sentral ng Pilipinas (BSP) to delay its own easing cycle, analysts said.
“If this policy drift continues, that would somewhat limit the pace of monetary easing by the BSP,” GlobalSource Partners country analyst Diwa C. Guinigundo said in a Viber message.
“While some people dream of a US Fed-delinked BSP, we believe the BSP will correctly be guided by data and information to avoid a possible market backlash from a reduced interest rate differential between the US Fed and the BSP.”
The US central bank last week held its benchmark overnight rate steady in the 4.25%-4.5% range amid expectations of rising prices as President Donald J. Trump threatens to impose tariffs on all its trading partners.
While Fed policy makers still expect the central bank to deliver two quarter-percentage-point rate cuts by the end of this year, that is largely due to weakened economic growth offsetting higher inflation, and what Fed Chair Jerome H. Powell called the “inertia” of not knowing what else to do given the muddled outlook, Reuters reported.
“Clearly, the US Fed tilted in favor of sustaining economic growth over its second goal of maintaining price stability even as it described it as ‘elevated,’” Mr. Guinigundo said.
John Paolo R. Rivera, a senior research fellow at the Philippine Institute for Development Studies, said the Fed’s decision signals a “more cautious but still dovish stance, driven by persistent inflation risks and elevated economic uncertainties.”
“This approach suggests the Fed wants to retain flexibility, which could influence emerging markets like the Philippines to also proceed more cautiously with monetary easing,” he added.
Investment banker and Managing Director at China Bank Capital Corp. Juan Paolo E. Colet also noted that while the Fed is expected to resume easing eventually, there is still “a lot of uncertainties on the timing and magnitude of rate cuts.”
This could prompt the BSP to slow its own pace of rate cuts, analysts said.
“While both the US and the Philippines are struggling with serious domestic political and economic issues, foreign investors would always be conscious of interest rate differentials which, in turn, could trigger capital flows and weakness in the peso,” Mr. Guinugundo said.
The Philippine central bank last month kept its key rate on hold at 5.75%, citing the risk of global trade uncertainties. Since August, it reduced interest rates for three straight meetings for a total of 75 basis points (bps) worth of rate cuts.
“For BSP, this could delay its own rate cuts slightly, especially if the Fed’s caution leads to short-term volatility in capital flows or pressure on the peso,” Mr. Rivera said.
He said the central bank will need to balance the inflation outlook and economic growth against risks of a depreciating peso and weakening investment outflows if it moves ahead of the Fed.
The peso closed at P57.33 per dollar on Friday, weakening by 10.8 centavos from its P57.222 finish on Thursday.
“The Fed’s decision not to lower policy rates will keep the US at the same level of strength and thus easing of rates on our part will cause our peso to depreciate,” Leonardo A. Lanzona, an economics professor at the Ateneo de Manila University, said in an e-mail.
“Once we reduce our policy rates, investors will likely shift their position to the US dollar. Furthermore, high tariffs in the US can limit our exports making the demand for the peso lower, thus reinforcing the possibility of a depreciation.”
The US dollar is considered a safe-haven currency as investors often flock to the dollar during times of financial crisis.
Mr. Guinigundo also noted through the exchange rate pass-through, which could be inflationary. This means there is scope for the BSP to “imbibe more cautiousness into its calculus,” he added.
Though it expects annual inflation to remain within the 2-4% target, the BSP has said there is a chance inflation could overshoot the target range in the second half of this year amid base effects.
The central bank also earlier flagged the potential inflationary pressures from higher global oil and non-oil prices, peso depreciation, and recent above-expectation inflation readings.
Accounting for risks, the BSP forecasts inflation to average 3.5% this year and next year.
“Thus, the combined high tariffs and the low interest rates in the US makes it very difficult for the BSP to ease interest rates as the peso depreciation and prospective increase in aggregate demand can cause inflation,” Mr. Lanzona said.
“Easing the interest rate will still be acceptable if it raises consumption to spur growth. What we do not need is a substantial decrease that can cause significant inflation because of these developments.”
RATE CUT OUTLOOK
The BSP could cut by a total of 50 bps this year, Mr. Guinigundo said, “all other things being equal.”
“We are sure the market has already priced in such magnitude of monetary easing on top of the monetary expansion through the aggressive reduction in the required reserve ratio.”
“With such dual steps by the BSP, that should challenge the domestic banks to respond and start easing their lending rates and further improve the credit condition faced by Philippine business,” he added.
For his part, Mr. Rivera said that the timing and pace of rate cuts could be delayed to the latter half of the year.
“This would give the BSP more clarity on inflation trends and Fed actions while avoiding financial market instability,” he said.
“A delay in easing could keep borrowing costs higher for longer, slightly slowing domestic demand, but it would also anchor currency stability and maintain investor confidence in the short term.”
He added that the BSP may choose to adopt a “gradual and data-dependent approach to avoid undue risk to financial and external stability.”
“If local inflation continues to trend lower and the peso remains stable, the BSP can diverge a bit from the Fed in terms of timing by cutting rates ahead, as long as our country maintains a minimum 100-bp policy rate differential with the US,” Mr. Colet said.
He expects the Monetary Board to cut by 25 bps at its next rate-setting meeting on April 10, as well as another 25-bp cut by the second half.
