This time, BSP ready to shadow US Fed rate hikes

The Bangko Sentral ng Pilipinas (BSP) on Thursday said it was ready to raise further its policy rate in the next few months to rein in inflation, which is expected to remain high, and in anticipation of ripple effects from another rate hike that the United States Federal Reserve had just announced.

The Monetary Board has four more policy meetings this year and BSP Governor Felipe Medalla said a rate hike of 0.25 to 0.5 percentage point (ppt) could be expected at the meeting in August.

The BSP said in a statement the US Fed’s most recent move to help tame inflation in the United States, coupled with tightening global financial conditions and worsening uncertainty about the prospects of worldwide economic growth, could drive foreign exchange rate movements in emerging market economies including in the Philippines.

Earlier increases in US federal fund rates that totalled at 1.5 ppt, had helped push the Philippine peso close to its historic weakest position against the US dollar—56.45:$1 that was reached in 2004.

This was prevented when the BSP made a surprise, off-cycle rate hike of 0.75 ppt last July 14. This also helped strengthen the peso back below the 56:$1 level.

Latest 75-bp move

However, the US Fed’s latest move has again narrowed the difference between interest rates in the United States (now at 2.25 percent to 2.5 percent) and in the Philippines (3.25 percent).

“In order to manage the spillover effects of such external developments, the BSP is prepared to utilize the full force of available measures in order to address the potential risks to Philippine inflation and inflation expectations arising from an overshooting or excessive depreciation of the Philippine peso,” the BSP said.

The central bank reiterated that it was ready to take all necessary monetary policy action to bring inflation back toward the 2 percent to 4 percent target range over the next few years.

“Further monetary policy adjustment will be carried out in the coming months commensurate with the primary objective of preventing inflation from becoming further entrenched,” the BSP said.

“The BSP believes the Philippines’ robust economic prospects continue to provide enough room for further tightening of the monetary policy stance,” it added.

BPI economists say . . .

To this, the team of economists at the Bank of the Philippine Islands (BPI) agree, arguing that BSP’ rate hikes through 2023 are “not expected to have a meaningful negative impact” on economic growth.

Indeed, they said, the BSP’s policy stance was still dovish compared to where the central bank stood before the pandemic, despite the large rate hike of 0.75 ppt earlier this month.

Citing data on lending, BPI lead economist Emilio Neri Jr. told reporters that borrowers were able to gain easier access to credit in recent months compared to 2020 and 2021 during pandemic-induced constraints.

Also, citing data from the BSP as well as BPI’s own, Neri said credit card transactions have exceeded prepandemic volumes despite rising commodity prices.

“Policy settings are still more accommodative than prepandemic and will only be mildly tighter compared to the previous decade,” the economist said.

He noted that, on average, growth in Philippine gross domestic product managed to expand by 6.4 percent from 2010 to 2019 when policy rates averaged at 3.8 percent.