A potential interest rate cut by the US Federal Reserve (Fed) in September is expected to have a significant impact on the global economy. Directly, this could trigger a gradual depreciation of the US dollar, potentially boosting demand for commodities primarily traded in the American currency. Moreover, it may embolden central banks worldwide to initiate or accelerate their own monetary easing policies.
Last week, in a bold move, the Bangko Sentral ng Pilipinas (BSP) reduced its policy rate by 25 basis points to 6.25%. In anticipation of possible rate cuts by the US Federal Reserve, the BSP has started to ease its monetary policy. While some central banks have adopted a more cautious wait-and-see approach, the Philippines has taken a proactive stance in shifting to a more dovish monetary environment to support its economy.
Recent cuts in rice tariff have likely bolstered monetary authorities' confidence that inflation will gradually converge to the target range of 2-4%. Also, the market, has reacted relatively calmly to the decision, with the Philippine peso appreciating by nearly 3% since the beginning of the month.
Recently, the country approved a 3.6 quadrillion rupiah (US$230 billion) budget for the coming year. Combined with a less restrictive monetary policy, this could stimulate consumer spending. The Jakarta Stock Exchange Composite Index has already captured gains in this more dovish environment, hovering near its all-time high.
Following the recent rate cut by the Bangko Sentral ng Pilipinas (BSP), Indonesia's central bank, Bank Indonesia (BI), is set to make its policy rate decision this week. Despite lingering fiscal concerns and potential pressure on the rupiah, there is growing speculation that the monetary authority may opt for a rate reduction to stimulate economic growth.
If Bank Indonesia confirms this measure, we can expect an increasingly favorable economic environment for expansion in Asia, which, in turn, should boost demand for commodities. This trend may be partly attributed to the adoption of more expansionary monetary policies by other central banks in the region, as well as the potential for a sharper depreciation of the US dollar, which would make dollar-denominated commodities more attractive to holders of other currencies.
The market is alredy pricing a Fed rate cut in September. As US Treasury yields decline, more central banks will find room to lower their interest rates without causing inflationary pressures or significant currency depreciation.
The most recent example was the central bank of the Philippines, which, despite some concerns about inflation, decided to cut rates last week. In this context, a similar move might happen this week with Indonesia, which also has high interest rates.
A less restrictive monetary environment in Asia could stimulate economic growth, thereby increasing demand for products such as oil, grains, sugar, coffee, and others. Combined with a gradual depreciation of the dollar, this could create a more bullish outlook for commodity prices.
