BSP poised to unleash big rate hike
THE BANGKO SENTRAL ng Pilipinas (BSP) is set to hike rates by 75 basis points (bps) this week, which analysts said is appropriate to support the peso and to curb inflation that reached a near 14-year high in October.
BSP Governor Felipe M. Medalla on Friday said the central bank is ready to follow the US Federal Reserve’s lead in aggressively tightening policy at its Thursday meeting.
“Since they hiked by another 75 bps, you can expect that I will be voting to raise the policy rate by a similar magnitude. The reason we do this is to increase the likelihood that headline inflation will be within (2-4%) target by the second half of next year and hopefully, for the rest of 2024,” he said in a recorded message at an event hosted by the Economic Journalists Association of the Philippines on Friday.
Inflation accelerated to 7.7% in October — the fastest pace in nearly 14 years, from the 6.9% print in September. October marked the seventh straight month inflation breached the BSP’s 2-4% target band.
For the 10-month period, inflation averaged 5.4%, still below the BSP’s 5.6% full-year forecast.
Since March, the US Federal Reserve has increased rates by 375 bps to 3.75-4%, including a 75-bp rate hike on Nov. 2.
The BSP, for its part, has raised rates by 225 bps since May. This brought the overnight reverse repurchase facility rate to 4.25%. A 75-bp hike on Thursday will bring the benchmark rate to 5%.
Mr. Medalla said the rate increases will prevent a “significant narrowing” of the interest rate differential between the Fed and the BSP.
“Keeping a comfortable differential between our policy rate and that of the US lends support to the peso,” he said.
The foreign exchange market has seen heightened volatility in recent months amid the US dollar’s strength.
The local unit closed at P57.23 on Friday, up by 96 centavos from its P58.19 finish on Thursday. This is the peso’s best close in nearly two months or since it finished at P57.16 a dollar on Sept. 15.
As of Friday’s close, the peso has declined by P6.23 or 10.9% versus the dollar from its Dec. 31, 2021 finish of P51.
“The BSP observes a flexible exchange rate policy. As such, we do not target a specific exchange rate nor set a specific line in the sand,” Mr. Medalla said.
“Nevertheless, we recognize that significant and persistent depreciation of the peso can dislodge inflation expectations. We, therefore, intervene in the market as needed, consistent with our price stability mandate,” he added.
ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the BSP is now expected to match any move by the Fed.
“We also expect BSP to match any rate hike carried out by the Fed in December as Governor Medalla vows to maintain the 100-bp differential,” he said in an e-mail.
Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said future rate hikes by the BSP for this year will continue to depend on factors such as global oil prices, US dollar performance, and domestic price movements.
“What’s crucial is the board demonstrates flexibility and determination to use its numerous policy tools to bring both core and headline inflation back on target, in contrast to their dyed-in-the-wool dovish guidance and policy rate decisions in late 2021 and the first semester of 2022,” Mr. Neri said.
China Banking Corp. Chief Economist Domini S. Velasquez said in a Viber message that October inflation was higher than expected, the rate hikes of the BSP seem to be on the right track.
“Many of the unexpected drivers in October’s print came from supply shock of higher food prices due to past typhoon and food shortages. This should be addressed through ensuring adequate food supply at reasonable prices by the National Government,” she said, adding that a larger rate hike on Thursday will not help supply issues.
ING’s Mr. Mapa said he does not expect an emergency rate hike by the BSP. “The governor is cognizant of the need to preserve price stability but not at the cost of growth,” he added.
The Philippine economy grew at a faster-than-expected pace of 7.6% in the third quarter, boosting the case for further monetary tightening by the BSP.
In the nine months ending September, gross domestic product (GDP) growth averaged 7.7%. Socioeconomic Planning Secretary Arsenio M. Balisacan last week said the economy would likely grow above the 6.5-7.5% full-year target.
Meanwhile, Mr. Medalla said the Philippines has enough gross international reserves (GIR) as of end-October, as the BSP exercises flexibility in selling dollars.
Based on preliminary data from the central bank, GIR reached $94.1 billion as of end-October, up 1.9% from the $93 billion as of end-September, ending eight straight months of decline.
The BSP attributed the increase from the dollar bond issuance in October, in which the government raised $2 billion (P118 billion).
“The uptick in GIR was tied solely to the bond issuance and thus we can expect GIR drawdown to resume in the next month as BSP remains active in the spot market to smooth out volatility. GIR will likely edge lower in the last few months of the year,” Mr. Mapa said.
The BSP is expecting a GIR of $99 billion for this year and $100 billion for next year.
“It’s a good thing that the central bank was the most active monetary authority in terms of GIR buildup to prepare precisely for moments like this. GIR is currently at $94 billion, roughly $20 billion more than the most recent low of $74 billion back in 2018,” Mr. Mapa added. — Keisha B. Ta-asan