Peso weakness could pause BSP easing cycle

A CONTINUED weakening of the peso could prompt the Bangko Sentral ng Pilipinas to pause its easing cycle this December, analysts said.

While most economists still see another 25-basis point (bps) reduction in the central bank’s policy rate, HSBC Global Research economist Aris Dacanay said the peso weakness was one “risk worth flagging.”

“If the PHP weakens against the USD due to global events, such as the US election, the BSP may opt to briefly pause its easing in December to give itself some flexibility if financial markets were to remain volatile,” he said in a commentary.

Easing could resume once volatility subsides, Dacanay continued, with the aim of lowering the policy rate — currently at 6.0 percent following two 25-bps cuts in August and September — to 5.0 percent by 2025.

“In other words, if there are delays to the easing cycle, those delays will likely be only brief,” he said.

The dollar has gained in recent weeks in anticipation of a White House return for former US president Donald Trump. It surged on Wednesday with Trump widening a lead over Vice President Kamala Harris, and the peso subsequently fell to P58.661:$1.

Dacanay, however, said that an improving inflation outlook could provide some room for the BSP to continue cutting rates in December.

Bank of the Philippine Islands (BPI) senior economist Emilio Neri echoed this, citing the possibility of a December rate cut due to favorable inflation but also noting that external developments could affect the BSP’s decision-making.

“The recent depreciation of the peso reflects the market’s concerns over the pace of the Federal Reserve’s rate cuts and the possibility that the Fed could pause,” he said.

“Markets continue to expect a rate cut from the Fed in November and December, but events in the past year have shown that these expectations can quickly shift,” he added.

Neri noted that inflation risks remained high in the US due to the economy’s strength.

Inflation expectations in the US could rise further if Republicans win the elections, he said, as their policies are often seen as inflationary. These factors could influence the US central bank’s policy path, potentially putting pressure on the peso.

“A pause in the rate cuts of the BSP continues to be possible given these uncertainties,” Neri continued, adding that “recent volatility in the markets highlights the need for prudence when it comes to rate cuts.”

“[A]ggressive action may not be prudent in the current climate,” he said.

“Global and domestic supply shocks can alter the outlook for inflation quickly, making a cautious approach to rate cuts more suitable to maintain stability.”