Softer inflation may help BSP move away from Fed

Softer inflation may help BSP move away from Fed

MANILA, Philippines — A faster-than-expected easing of inflation at home could give the Bangko Sentral ng Pilipinas (BSP) enough space to “partially break free” from the need to move in lockstep with the US Federal Reserve and put more focus on local developments when making policy decisions, HSBC Global Research said.

According to Aris Dacanay, economist at HSBC, the Philippines is now the only economy in Southeast Asia whose real policy rate differential from the Fed exceeds prepandemic levels.

”It helped that the BSP was aggressive in raising its policy rates in a timely manner,” Dacanay said in a report.


”Not only did it keep nominal interest rates high, but it also helped bring core inflation down and re-anchor inflation expectations,” he added.


The real policy rate is the nominal rate adjusted for inflation. The differential matters because the wider it is, the better the Philippines can attract foreign capital that are seeking high returns.

BSP, US Fed policy rate differential

In the first quarter, the differential between the BSP policy rate and the US Federal Funds target rate stood at 100 basis points—a gap that local monetary authorities try to maintain to avoid pressuring the local currency, which had been trading at 19-month lows for most of June.

READ: BSP hints at policy rate easing by August

The BSP retained its key rate at a 17-year high of 6.5 percent in the first three months of the year. The US Fed likewise kept its target range for the federal funds rate at 5.25 to 5.50 percent.

Should local price gains further ease in the coming months following the government’s decision to slash tariffs on rice, Dacanay expects the rate differentials to further widen.

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