BANGKO SENTRAL ng Pilipinas (BSP) policy path leans towards easing, but pace of cuts should be cautiousfully considered, an official said.
“In the case of the central bank, we have actually had two meetings where the Monetary Council has relaxed the policy position. The message is that while the general direction is still towards easing, the pace needs to be considered very carefully,” BSP Vice Governor Francisco G. Dakila, Jr. said. at the ASEAN+3 Economic Cooperation and Financial Stability Forum.
The Monetary Board is expected to implement another 25 basis points (bp) interest rate cut on Thursday, 13 of 16 analysts said in a note Business world poll conducted last week.
If this comes to fruition, it would be the third straight meeting at which the central bank has cut rates.
It would also bring the benchmark interest rate from the current 6% to 5.75%, for a total cut of 75 basis points by the end of 2024.
The BSP started its rate cutting cycle in August with a 25 basis point cut and made another cut of the same size in October.
BSP Governor Eli M. Remolona Jr. previously said they plan to implement the interest rate in “baby steps.” He also noted that while they will likely relax further next year, it won’t necessarily happen every meeting or every quarter.
“When we started the pace of easing, we thought the Fed would cut rates by about 100 basis points in 2025,” Dakila said.
“And now… that space has changed significantly, as the Fed is now expected to rise by just 50 basis points in 2025,” he added.
Markets are awaiting further signals from the US Federal Reserve’s final meeting for the year. Investors consider it almost a given that the Fed will cut rates by a quarter of a percentage point at its December 17-18 meeting. However, according to CME’s FedWatch tool, markets have only priced in an 18% chance of a rate cut in January, Reuters reported.
“Due to the changing inflation dynamics in the United States, we may not be looking at a scenario where the Fed would raise rates again at this time,” Mr. Dakila said.
“But the most likely scenario is that they will still decline in 2025, but at a slower pace than before. And we have taken that into account in our policy scenarios,” he added.
However, Mr Dakila said the BSP prefers to consider domestic data in its policy decisions.
“But still, the most important consideration for monetary policy would be domestic inflation and how it compares to the target,” he said.
Overall inflation averaged 3.2% over the eleven-month period, still well within the BSP’s target range of 2-4%.
“Even when we look at the risk-adjusted forecasts, they remain within the target range. That said, the primary consideration for monetary policy would be domestic inflation, and how inflation compares to the target,” Mr Dakila said.
The central bank expects inflation to average 3.1% this year.
Meanwhile, Mr. Dakila said the peso’s recent performance is comparable to other currencies in the region. Currency fluctuations have less impact on the inflation target, he added.
“Just to note that in targeting inflation, we have seen that the sensitivity of inflation to changes in the currency has decreased significantly as the public has become more accustomed to seeing greater volatility in the peso.”
“I think that’s a good sign because it means we don’t have to worry as much about our ability to meet the inflation target while sticking to a market-determined exchange rate.”
The peso closed at P58.671 per dollar on Monday, weakening 20.1 centavos from Friday’s P58.47. This was the weakest performance since the close of P58.71 per dollar on November 27.
“Having said this, as the Governing Council has already said, we retain the ability to enter the market if there are circumstances that threaten to bring about an abrupt change in the exchange rate that could disrupt inflation expectations,” Mr Dakila said . added. — Luisa Maria Jacinta C. Jocson