BSP ready to raise rates by 50 bps in August

Inflation in the Philippines is expected to remain high over the remainder of this year and probably next year as well, prompting Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla to say that monetary authorities are “prepared” to tighten their policy aggressively—possibly with a 50-basis-point hike in August.

The Monetary Board has raised the BSP’s overnight borrowing rate twice at 25 basis points (bps) each in May and June.

This brought the key policy rate, which languished at a record low of 2 percent from November 2020 to April this year, to 2.5 percent.

Analysts have raised concerns about the BSP’s gradual pace at normalization, especially as influential central banks like the United States Federal Reserve picked up pace of their own tightening.

US Fed’s moves

Over three recent policy meetings, the US Fed raised their policy rate by 25 bps, then 50 bps and finally 75 bps. This has helped put the US dollar in its strongest position against other currencies, including the Philippine peso, in two decades.

Medalla acknowledged that there are pros and cons to gradualism, adding that if inflation were too high, “a monetary policy response may be necessary.”

“It’s not prudent to let factors that significantly affect the exchange rate to add further to inflation that is already high,” the BSP chief said.

Medalla, who is also chair of the Monetary Board, added that not acting proportionately to high inflation would be even more imprudent if it could not be ruled out that the government might miss its goal of shepherding inflation to within 2 percent to 4 percent “not only this year but next year as well.”

He reiterated that the BSP was strongly committed to maintaining price stability, and is closely monitoring developments in the financial markets, particularly the recent hawkish stance of the US Fed.

Aggravating inflation

“If such pressures are left unchecked, these could add to the already high domestic inflationary pressures,” Medalla stressed.

“And because of this, the BSP is prepared to be more aggressive in raising its policy rate, compared to its initial gradualist stance,” he said. “ In particular, BSP is prepared to raise its policy rate by 50 bps by August.”

According to ING Bank, inflation in the Philippines may peak at 7 percent in the fourth quarter this year, no thanks to a surge in global commodity prices and second-round effects such as higher wages and transport costs.

“Headline inflation will likely peak at 7 percent by the fourth quarter, something BSP is likely well aware of as they bumped up their inflation forecast for the second half of the year,” the bank said in a commentary.

Considering this, ING Bank reiterated that the Monetary Board may need to go for rate hikes of 50 bps each at their next two meetings in August and September.