Introduction to Monetary Policy
The Bangko Sentral ng Pilipinas (BSP) has been given more room to continue its policy easing to support economic growth. This comes after the US Federal Reserve delivered a much-awaited cut on Wednesday. However, the BSP may stay cautious amid lingering inflation risks.
The Fed’s Decision
The Fed’s decision to cut its policy rate by 25 basis points (bps) to a range of 4%-4.25% has given the BSP more space to cut rates further if growth remains in need of support. According to Metropolitan Bank & Trust Co. (Metrobank) Chief Economist Nicholas Antonio T. Mapa, "The Fed decision is but one additional factor for BSP’s policy calculus… Last night’s decision and potential subsequent easing would afford BSP more space to cut rates further should growth remain in need of support."
BSP’s Next Move
BSP Deputy Governor Zeno R. Abenoja said the central bank will continue to monitor both inflation and growth. "This year, we think inflation will average below the target. The target is 2% up to 4%. We may be averaging at around 1.7%… But for the next two years, 2026, 2027, inflation will be back in the middle of the target, around 3.3% to 3.4%, and because of that, we may be near the appropriate interest rates for policy," he said.
Inflation and Growth
The BSP has lowered borrowing costs by 25 basis points (bps) for a third straight meeting to bring the policy rate to 5%. It has now reduced benchmark interest rates by a cumulative 150 bps since it began its rate cut cycle in August 2024. BSP Governor Eli M. Remolona, Jr. has left the door open to one more reduction within this year to support the economy if needed.
Impact on the Peso
Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the BSP could match the Fed’s future cuts to maintain a "healthy" rate differential, but only if the data show a weakening economy and manageable inflation. The US central bank’s latest move put the difference between its target rate and the BSP’s to 75 bps.
Experts’ Opinions
According to Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines, "The Fed’s easing gives BSP more room to cut without risking sharp peso depreciation… If BSP cuts again while the Fed continues easing, the differential will likely remain within a safe range, especially if both move in tandem." Philippine National Bank economist Alvin Joseph A. Arogo said the BSP is more focused on domestic economic indicators, particularly inflation and GDP growth, when calibrating its monetary policy.
Conclusion
In conclusion, the BSP has been given more room to continue its policy easing to support economic growth after the US Federal Reserve’s latest cut. However, the BSP may stay cautious amid lingering inflation risks. The impact of the Fed’s decision on the peso will depend on various factors, including the BSP’s next move and the state of the economy. As experts have noted, a wider gap between the BSP and Fed’s key rates could attract foreign inflows, prop up the peso, and limit imported inflation. Ultimately, the BSP’s decision will depend on its assessment of the economy and its goals of promoting growth while controlling inflation.
