Rising calls for a rate cut following tamer-than-expected inflation and slower-than-expected economic growth weighed on the Philippine peso, which lost 0.76% against the dollar to P57.87 on Monday. This brings the peso closer to the line in the sand drawn by the BSP at P58.00 to the dollar, at which point they will begin to intervene in the forex market to keep the currency afloat.<\/p>\n\n\n\n
Inflation for April printed at 3.8%, better than the 4.1% median estimate, while 1Q24 GDP was reported at 5.7%, slower than the consensus expectation of 5.9%. While GDP growth was a bit faster than the 5.5% recorded in 4Q2023, household spending and gross capital formation has shown some red flags which can likely be traced to the elevated interest rates. <\/p>\n\n\n\n
The Monetary Board met on Thursday and kept rates at the same level. There is rising expectation that the BSP will temper its hawkish rhetoric and start setting the stage for a rate cut later this year. This could potentially narrow the gap between the BSP and the Fed\u2019s rates, as the Fed is not expected to cut rates until at least September.<\/p>\n\n\n\n
On the plus side, weakening currencies in the region has made assets more attractive to foreign investors. Fund managers have piled into emerging market ETFs the past week, the third week of such inflows, as they seek growth stories outside of developed economies. However, even though the Philippines showed one of the fastest growth in inflows, we still captured only a tiny slice of the pie. Further, most of these inflows went into the bond market rather than into equities. <\/p>\n\n\n\n
On the downside, a weak peso could further rekindle inflation as it would make rice and fuel imports more expensive. We expect that the BSP will try to keep the exchange rate below P58, but it is very likely that it will continue to trade within the narrow band of P57-58.<\/p>\n\n\n\n