BSP may pick up pace of interest rate cuts

The Bangko Sentral ng Pilipinas (BSP) could opt to pick up the pace of interest rate cuts late this year, HSBC Global Research said, potentially allowing greater peso volatility to support economic growth, according to a report by Manila Bulletin.

The report by economist Aris Dacanay and foreign exchange (FX) strategist Lenny Jin said the BSP would be prioritizing economic expansion over currency stability by narrowing the policy rate differential with the US Federal Reserve (Fed).

"A more competitive PHP (Philippine peso) benefits both exports and FDI (foreign direct investments)," they noted.

"Hence, there is room for the BSP to shift toward a less defensive FX policy, given that the PHP is one of the most overvalued currencies in Asia while the Philippines' trade relationship with the US and the Philippines' currency practices are not under any strong scrutiny."

The central bank has kept a defensive stance with regard to the peso, intervening in foreign exchange markets and keeping a wide interest rate gap with the Fed's rates. Shifting to a more flexible exchange rate policy, HSBC said, could help strengthen the country's exports, particularly services.

"A weak or depreciated currency can raise an economy's competitiveness in trade," the report said.

"If, say, the peso depreciates, the goods that the Philippines exports then become cheaper to importers or, potentially, more competitive versus competing exporters."

The analysts said the shift could happen in the second half of the year and forecast the exchange rate to break above record high of P59:$1 in the third quarter.

"Given that the BSP has now aligned rates and FX policies in the defensive direction, we think when the BSP shifts, both policies will go hand in hand," they added.

While a weaker currency could lead to inflationary pressures, HSBC noted that core inflation remained well within the BSP's 2.0- to 4.0-percent target range, providing room for the central bank to absorb some volatility.

Furthermore, declining global oil prices could help offset the inflationary impact of a depreciating peso.

The report also pointed out that the country's manufacturing sector was struggling relative to other Asean economies, with its share of gross domestic product declining more than regional counterparts since 2010.

A weaker currency, HSBC suggested, could help reverse this by making Philippine-made goods more competitive.

Moreover, it argued that narrowing the policy rate gap could increase demand for dollar-denominated assets, make it easier for importers to hedge currency risks and reduce costs for traders betting against the peso.

In terms of FX policy, the BSP might adjust its approach — selling fewer dollars when the peso weakens, but continuing to build reserves when it strengthens.

The analysts said the BSP could start moderating its dollar-selling interventions in the second half while gradually accumulating reserves when the peso strengthens.

This would mark a shift from recent interventions, which saw the central bank selling over $12 billion between the fourth quarter of 2024 and January 2025 to stabilize the peso.

Despite potential political risks, including higher costs for imported goods and their impact on public perception, HSBC said there would likely be limited scrutiny from the US on the Philippines' currency practices, giving the BSP room to maneuver.

It said the BSP could begin cutting rates by 25 basis points in the second quarter, followed by similar reductions in the third and fourth quarters. This would bring the policy rate to 5.0 percent by year-end, assuming that inflationary risks remain contained.