Likely scenario: one rate cut for the year?

PHILIPPINES - In Brief 01 Jul 2024 by Diwa Guinigundo

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As expected by the markets, the BSP decided to keep its policy rates steady at 6.5%, the highest in 17 years last Thursday, June 27. Accordingly, interest rates on overnight deposit and lending facilities remained unchanged at 6.0% and 7%, respectively. Now focusing on the exchange rate path, the BSP conveyed to the market its optimism that inflation would continue to ease as tariff rate on rice imports was reduced from 35% to 15% pursuant to Executive Order (EO) 62. In addition, the monetary authorities also announced that the balance of risks has shifted to the downside for both 2024 and 2025. Given the average inflation rate of 3.5% for the first five months of 2024, the BSP stressed that inflation is “moving closer” to the midpoint of 2-4% target. While the Development Budget Coordination Committee (DBCC) firmed up its inflation forecast for 2024 and 2025 at 3-4% and 2-4%, respectively, the BSP conveyed its “somewhat more dovish” monetary stance and issued a forward guidance of a possible rate cut of 25 basis points (bps) each in the third and fourth quarters. The market duly noted that the previous formulation of a sufficiently tight monetary policy has been abandoned. It was correct for the BSP to have linked its forward guidance to the improving prospects for inflation down the line. In the recent past, there was less emphasis on the more manageable path of inflation and more on delinking its move from the US Fed action. It was also timely for the central bank to have commented on the peso movement for the exchange rate pass through could also upset inflation dynamics. This is possible when the peso depreciates by a large amount over a prolonged period. The occa...