The Monetary Board is expected to raise on Nov. 17 the policy rate of the Bangko Sentral ng Pilipinas (BSP) by 0.75 percentage point (ppt) to match an expected hike by the United States Federal Reserve (US Fed), whose Open Market Committee will meet on Nov. 1 to 2.
If this happens, it would be the first time the BSP would mimic the US Fed’s moves since both central banks started tightening after latching on to accommodative policies at the height of the COVID-19 pandemic.
The BSP’s overnight borrowing rate was at a record low of 2 percent until it started raising rates in May. The US Fed’s target range for the federal funds rate was at zero to 0.25 percent until it embarked on normalization of policy last March.
The BSP’s key rate is now at 4.25 percent while the Fed’s is at 3 percent to 3.25 percent—a difference of one to 1.25 ppt.
On Nov. 1 to 2, the American central bank is expected to go for its fourth consecutive 0.75-ppt hike.
“BSP Governor Felipe Medalla indicated that the BSP may need to match the Fed’s projected [rate hike] in November,” said Nicholas Mapa, senior economist at ING Bank.
“We expect a 75 basis point [or 0.75 ppt] rate hike from BSP in November and another punchy rate hike in December to maintain a 100-bp [or one percentage point] differential with the Fed,” Mapa said.
Old stance: no matching
Before this latest signal from Medalla, both he and his immediate predecessor Benjamin Diokno—who is now Finance Secretary—have insisted that there was no need to match the Fed’s move point for point.
“Governor Medalla also downplays the need for an emergency rate hike by the BSP indicating he would prefer to telegraph his next move which is looking more like a 75-bp [increase] at the November meeting,” Mapa added.
Also before this most recent hint from Medalla, ING Bank was expecting the BSP to bring its policy rate to 5.25 percent by the end of this year, which means combined increases of one percentage point in November and December.
Next phase
Meanwhile, analysts are now looking at the clues that the Fed might slow down on its tightening after the November meeting.
ING Bank said that market expectation now places the US Fed’s key rate to peak at 4.82 percent instead of the previous forecast of 5 percent.
If so, that would mean a hike of at least another 0.75 percentage point in December, which the BSP will match if the latest statement from Medalla will carry through.
Last week, Diokno said the government may prevent the local currency from hitting 60:$1 by intervening in the foreign exchange market with $10 billion worth of gross international reserves aside from further raising the BSP’s benchmark rate by a total of one percentage point over two policy meetings in the next two months.
Diokno later clarified that market intervention was his personal opinion and does not represent a decision of the Monetary Board, of which he is one of seven members.
Still, he added that his comments about further policy rate hikes agreed with the recent statements Medalla said during meetings in Washington, D.C.
On Wednesday, the peso appreciated for the second day in a row and closed at 58.43:$1. The local currency hit its record weakest of 59:$1 four times this month.