The Bangko Sentral ng Pilipinas (BSP) has paused its easing cycle, citing concerns about foreign exchange-induced inflation fueled by the strengthening US dollar. Economists agree that the move is a prudent step to protect the peso and manage inflation risks stemming from the dollar-denominated pricing of imports.
Economists on Friday commented on the Bangko Sentral ng Pilipinas' ( BSP ) recent decision to halt policy rate cuts, emphasizing its role in mitigating the risk of foreign exchange-induced inflation amidst the resurgence of the US dollar. Aris Dacanay, HSBC Economist for ASEAN, elucidated the rationale behind the BSP 's pause, stating its desire for monetary policy flexibility in the face of global trade uncertainties.
He particularly highlighted that halting the easing cycle would bolster the peso and dampen the risk of FX-induced inflation if US trade policies lead to renewed USD strength. Dacanay expressed concerns about substantial exchange rate fluctuations, as they often trigger inflationary effects. BSP Governor Eli M. Remolona Jr., in a televised interview, acknowledged the possibility of the peso depreciating to 60 against the US dollar. While he downplayed the significance of the specific exchange rate, he stressed the importance of managing large swings to prevent inflationary pressures stemming from the dollar-denominated pricing of some Philippine imports. Remolona explained that significant fluctuations could lead to inflationary consequences, prompting the BSP to mitigate these swings. He pointed to the prevailing influence of the dollar's strength on the peso's dynamics, a trend observed since the beginning of the year.Following the Monetary Board's decision to maintain the policy rate at 5.75 percent, some economists adjusted their rate cut forecasts. Dacanay noted that HSBC had previously predicted no cuts in the second quarter of 2025, but now anticipates the BSP to resume rate reductions during the June 2025 Monetary Board meeting. HSBC expects a 25-basis-point cut to 5.50 percent, maintaining its forecasts for the second half of 2025. However, these projections hinge on the Federal Reserve reducing its policy rate to 3.50 to 3.75 percent by year-end. Dacanay cautioned that a hawkish stance by the Fed could elevate the floor of the BSP's easing cycle, potentially intensifying the risk of FX-induced inflation. Conversely, he acknowledged that if economic growth persistently underperforms, concerns regarding growth might overshadow anxieties about foreign exchange volatility. HSBC suggested the BSP might eventually cut rates more aggressively than the Fed to enhance the peso's competitiveness, thereby stimulating demand for exports as supply chains evolve.Nalin Chutchotitham, Citi Economist for the Philippines, revised the expectation of the next 25-basis-point rate cuts to April, August, and December. Chutchotitham stated that while the BSP could potentially implement a total of 75 basis points in cuts this year, considering the high real policy rate and positive interest rate differential with the Fed, Governor Remolona's more conservative forward guidance of a 50 basis point reduction this year indicates that a third cut remains contingent upon several factors beyond domestic demand and inflation. These factors include the timing and magnitude of the Fed's rate cuts and US trade policy actions, which could significantly influence USD strength and, consequently, some degree of FX pass-through to inflation
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