BSP telegraphs rate hike to reassure local markets

Bangko Sentral ng Pilipinas. (File photo / Philippine Daily Inquirer)

The policy rate of the Bangko Sentral ng Pilipinas (BSP), currently at 4.25 percent, is now expected to reach 6 percent by the end of the first quarter in 2023 after the BSP announced in advance a 0.75-percentage point (ppt) policy rate hike on Nov. 17, according to Goldman Sachs.

BSP Governor Felipe Medalla telegraphed the Monetary Board’s move in their next meeting two weeks ahead just six hours after the US Federal Reserve announced that their target range for the federal funds rate was raised to 3.75 percent to 4 percent from the 3 percent to 3.25 percent that was in place since Sept. 21.

This was the fourth consecutive 0.75-ppt increase by the US Fed, which was expected as the American central bank pushed on with its long-term goal of seeing US inflation go down to 2 percent.

With US inflation pegged at 8.2 percent in September and expected to rise again in October, the Fed said it anticipated additional policy rate increases ahead.

“The BSP deems it necessary to maintain the interest rate differential prevailing before the most recent Fed rate hike, in line with its price stability mandate and the need to temper any impact on the country’s exchange rate,” Medalla said.

Before the latest move by the US Fed, the BSP’s policy rate was higher than the American’s by one ppt to 1.25 ppt.

“By matching the Fed’s rate hike, the BSP reiterates its strong commitment to its mandate of maintaining price stability by aggressively dealing with inflationary pressures stemming from local and global factors,” Medalla added.

“Note that [the BSP’s 0.75-ppt] hike will be effective after the Nov. 17 meeting [of the Monetary Board], so it is not ‘off cycle,’” he said.

Last July 14, Medalla as Monetary Board (MB) chair called an emergency meeting which resulted in an immediate increase of 0.75-ppt in the BSP’s policy rate. This was more than a month before the MB’s regular meeting scheduled for Aug. 18.

The Nov. 17 increase is bigger than the 0.5-ppt hike that Goldman Sachs’ economic research team had forecast, although they had noted risks toward a large increase in view of the BSP’s concern about the rapid depreciation of the peso.

The New York-based investment bank also expects further BSP rate increases that are bigger than its earlier forecast, mainly due to a potential 50-basis-point (bp) or 0.5 ppt hike from the Fed in December.

“We now expect the BSP to hike another 50-bp in December (from 25 bps earlier), before slowing to a 25-bp pace in February and March (we had earlier expected just one additional 25-bp hike in February),” Goldman Sachs said.

This brings the group’s forecast for the BSP policy rate to peak at 6 percent from 5.25 percent earlier.

Michael Ricafort, chief economist at the Rizal Commercial Banking Corp., said the latest move by the BSP—on top of other measures in the policy tool kit—would help stabilize the peso exchange rate as well as actual inflation and inflation expectations.

“The clear and specific signals from local authorities have been unprecedented in a positive manner, in terms of greater transparency and forward-looking in nature,” Ricafort said.

He said such signals would promote greater stability for the local economy and financial markets, as well as create an environment more conducive for better planning and preparations for businesses, consumers, other institutions and the general public.