The decision by the Federal Reserve to hold US interest rates steady following May’s inflation data, which came unexpectedly unchanged, could have dimmed expectations for a rate cut by the Bangko Sentral ng Pilipinas during its August policy meeting.
According to economic observer Jonathan Ravelas, currently managing director at eManagement and Marketing Services and previously chief market strategist at BDO Unibank, this move by the Fed may have tilted the scale towards the likelihood of the BSP keeping key interest rates steady throughout 2024.
The BSP has been in a holding pattern since pausing its rate adjustments in October last year. Prior to that, it aggressively tightened monetary policy to combat inflation.
Between March 2022 and October 2023, the BSP raised the key interest rate by a total of 4.5 percentage points to 6.5 percent, after reducing it to a historic low of 2.0 percent to support businesses amidst the COVID-19 pandemic and stimulate economic activity.
While these rate hikes initially helped reduce inflation to 2.8 percent in January, at the lower end of the BSP’s 2 percent to 4 percent target range, inflation has since risen steadily due to persistently high energy and food prices, particularly rice. In May, inflation reached 3.9 percent, and with electricity rates increasing and rice prices remaining elevated, the risk of inflation exceeding the 4 percent threshold in the coming months seems likely.
Considering this outlook, Ravelas expressed skepticism about the possibility of the central bank cutting rates this year. He stated, “I am not expecting any cuts in 2024 and anticipate three cuts to 5.75 percent in 2025.”
Indeed, Finance Secretary Ralph Recto, a member of the BSP’s policy-making Monetary Board, had previously suggested that interest rates would likely remain higher for an extended period. However, he still foresaw the BSP implementing a couple of rate reductions this year.
Keeping the spread between US federal funds rate—now between 5.25 percent and 5.50 percent—and the BSP overnight rate is key to ensuring the Philippine peso doesn’t weaken further against the US dollar. The USD opened Friday at P58.65 after closing Thursday at P58.58.
Although the Monetary Board’s statement after its policy meeting on May 16 said it “deems it appropriate to ensure sufficiently tight monetary policy settings until inflation settles firmly within the target range,” BSP governor Eli Remolona raised hopes a couple of rate cuts totaling half-a-percentage point is possible in the second and that it could come even ahead of a similar action by the Fed.
