BSP may pause aggressive rate hikes after Aug. 18

Published August 2, 2022, 6:10 PM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) may decide to pause after raising the key benchmark rate this month and resume rate hikes in small doses “early” next year or in the first quarter of 2023.

BSP Governor Felipe M. Medalla hinted on Tuesday, Aug. 2, that after implementing a 25 basis points (bps) to 50 bps rate increase this month, it could stop at 3.50 percent or 3.75 percent key rate for 2022. This is because the inflation rate may have already peaked in June and the peso-US dollar rate volatility may stabilize further after the Monetary Board’s Aug. 18 rate increase.

BSP Governor Felipe M. Medalla

However, the BSP chief said he is not yet saying for certain that they will pause after August. There will be more economic data to watch out for when the Monetary Board meets in September, November and December to either move or keep rates steady.

“Every six weeks, we have a careful review of the data. And I am, right now, not ruling out .25 or .5 this week and then maybe all zeroes later on or maybe some zeroes and some .25s. That’s why we are waiting for the data,” said Medalla.

in a forum hosted by Financial Executives Institute of the Philippines, Medalla said that at 3.25 percent, the BSP policy rate is still low. It remains a negative real rate which happens when the key rate is lower than the inflation rate. As of end-June, the average actual inflation is 4.4 percent and the BSP’s 2022 forecast is five percent, higher than the policy rate even if its raised to 3.75 percent this month.

“I think that in real terms, it’s still low. For the rest of the year we will be, and early next year, we will be actually looking very closely at data,” he said, adding that this month’s rate hike “is not the last.”

“It’s not for sure that it’s not the last,” said Medalla. “Therefore it could be the last. That’s the hard thing about double negatives,” he said.

The off-cycle 75 bps rate hike last July 14 has done its job of keeping the peso below P56 and it will also help in preventing a disanchoring of inflation expectations.

Another rate hike this month – whether by 25 bps or 50 bps – could be enough for 2022 if inflation tapers off after reporting a three-year high of 6.1 percent in June. Since May, the Monetary Board has lifted the key borrowing rate by 125 bps.

“We care a lot about the exchange rate when it’s moving up too fast because who will believe our inflation targets. It will disanchor inflationary expectations,” said Medalla.

The BSP has sold US dollars to smoothen out volatility pressures but not much. “Our reserves’ comfortable but not excessive and this is not the time to waste our bullets,” he stressed. As of end-June, the country’s foreign exchange reserves total $100.9 billion, it has lost $6.8 billion since the start of the year when the reserves was at $107.69 billion in January.

The economy can absorb another rate increase this month. “The policy rate even after the (125 bps) increase is still significantly lower than what it used to be. (It) is still negative in real terms so we can afford to step on the breaks without killing the nascent economic growth,” said Medalla. Before the pandemic, the BSP rate was at the 4.75 percent level in early 2019.

As for the peso-US dollar price, the BSP chief said the exchange rate will continue to be flexible and market-determined.

For now, the BSP monitors the depreciation pressures such as the aggressive monetary policy tightening by the US Federal Reserve and increased market risk aversion with the still ongoing Ukraine war with Russia. Another factor weakening the peso is the widening trade gap amid improving domestic demand and uptick in global oil prices.