The U.S. Federal Reserve’s 50 basis-point reduction in its interest rates gives the local economy a boost and businesses hope for a recovery in 2024.

The United States Federal Reserve’s move to slash interest rates by 50 basis points after four years gives the Philippine’s Monetary Board more leeway to reduce its own rates. The fed rate cut is anticipated to lower the cost of doing business and spur more economic activity, while strengthening the peso and Philippine stocks.

For Barry (not her real name), whose family is in the export industry, the news is long awaited. “We expect that this will lower local borrowing rates soon and really help us reduce our costs and recover,” she shares.

Their business was one of many that got hit during the global pandemic, as orders were cancelled and sales plummeted. “We usually take out an annual loan, but pay it in full before the end of the year. But because of the pandemic, things changed. We are now still paying off our 2019 loan at a higher rate and with lower revenues,” she laments.

But now things are finally starting to look up, and with the Bangko Sentral expected to continue lowering interest rates, she expects their borrowing cost to go down soon as well.

The news is also a godsend to individuals with existing housing and car loans, whose borrowing rate is adjusted yearly. Most housing loans currently follow a pattern where the loan enjoys a fixed rate for one, three, or five years, after which it is repriced annually, depending on the current economic environment.

“For the past two years, the Bangko Sentral’s independence was tested since it had to manage the peso’s weakening. But today, the BSP’s independence was reinforced,” observes Jomar Lacson, Head of Macroeconomic and Sustainability Research at ATR Asset Management. “Now they can implement their own rate cuts,” he adds. The Bangko Sentral raises interest rates when the peso weakens and the inflation rate increases, as part of its monetary management.

Fed Rate Cut: Better Outlook

In a report, Metrobank Research said it maintains its prediction of a 75 basis-point total rate reduction this year. “This translates to a 25-basis point cut in both October and December. We expect a further total reduction of 100 basis points in 2025, which would bring policy rates down to 4.75% by the end of 2025,” it said.

The bank has also revised its peso outlook to PHP 55.3 to the US dollar in 2024, and PHP 54.5 in 2025. Lacson, on the other hand, believes the peso can appreciate up to PHP 53 to the US dollar this year.

For the equities market, Lacson shares their team is currently re-assessing its previous forecast of 7,400 for the PSE index with the recent positive development.

Expectedly, the rate cut would also mean a higher risk appetite for investors, as they seek out assets with higher returns, such as equities, treasuries, and property investments.

Hope Floats

The U.S. Federal Reserve recently cut its interest rates by 50 basis points for the first time in four years, giving emerging markets a boost. The following day, the PSE Index rose to the 7200 level for the first time since March 2022, while the peso gained 11 centavos against the US dollar, and closed at PHP 55.61 from PHP 55.72.

“Everything is more optimistic. Inflation is declining, the peso is stronger and interest rates are going down,” affirms Lacson.

For Barry, the news gives them hope and encouragement, at last. “Sales are starting to pick up, rates are going down and we are just grateful that we survived and things are finally getting back on track,” she says.