FREE Commentary: BSP turning more dovish

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Finance Secretary Ralph Recto echoes the more dovish tone from the BSP saying that the BSP may cut rates by 150bps (1.50%) through 2025 to spur the local economy as inflation remains manageable.

The BSP rate cuts could start the rate cuts in the 3rd quarter (3Q) 2024 and it could implement more cuts next year. Recall that the BSP previously hinted that it may slash its key rates by as much as 50bps (0.50%) this year with an easing cycle that may start as early as August 2024.

On forex, the BSP said that it is “closely monitoring” the exchange rate and that it is not targeting a specific level for the peso. Though it added that the peso could stay within the P55-58/USD range that the Budget Committee uses in its economic assumptions this year and next.

Our View: While we forecast a 50bps (0.50%) rate cut this year — down from 75bps earlier — we don’t see the BSP moving ahead of the Fed which, as per the latest projections, is only expected to start easing by September at the earliest.

With interest rate differential near historic lows (more than 1-sd below the 10-year average differentials), an earlier move from the BSP could only add pressure on the peso which has already depreciated in reaction to the BSP turning more dovish.

As it stands, the Peso is down 4.7% year-to-date (YTD) and is the 2nd weakest among ASEAN currencies YTD (next only to the Thai Baht which has depreciated by 6.65% YTD). We do note though that the BSP has ample reserves (with GIR at US$102 billion or 7.6 months import cover) which it can deploy to smoothen any increased volatility in the forex market.

Recommendation: This latest dovish signals from the DOF and BSP should buoy sentiment towards the Property and Consumer sectors while the Banks could see some profit-taking. In terms of the currency, the ‘winners’ from a weaker peso are the Property and Power/Energy sectors while the ‘losers’ are the Conglos and select Consumer stocks.

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