BSP to hike policy rates again in Dec.
By Lee C. Chipongian
The Bangko Sentral ng Pilipinas (BSP) is expected to go for another policy rate hike of 50 basis points (bps) on Dec. 15, lifting the overnight borrowing rate to 5.50 percent.
BSP Governor Felipe M. Medalla said they will keep a tightening mode and maintain a decent interest rate differential between the BSP and US Federal Reserve funds rate to stabilize exchange rate pressures.
The BSP chief, however, has not yet signalled by how much the Monetary Board will increase the policy rates next month, but the possibility of again matching the US Fed action is high.
Medalla is also ruling out a pause in the immediate future. “The forex (foreign exchange) market is expected to remain very sensitive to the interest rate differential. A 50 (bps) by the US Fed in December can’t be met by a pause by the BSP,” he told Manila Bulletin.
He has said before that interest rate differential should be at least a 100 bps. As of Nov. 2, the US Fed rate stood at 3.75 percent to four percent versus the BSP’s five percent as of Nov. 17.
On Friday, Nov. 18, the peso vis-à-vis the US dollar closed stronger at P57.26 compared to P57.36 on Nov. 17, the day the BSP announced its expected BSP rate hike.
In a press briefing after the Monetary Board meeting, Medalla said they cannot let the interest rate differential to fall back at this time.
“We don’t really have a model that says if the interest rate is this, the exchange rate will be this, because there are so many things that cause the exchange rate to move. However, what we do know is if the interest rate differential is too small especially during times when the US economy is the only game in town, then the peso” will tend to behave abnormally, he said.
“This is the reason why right now, the US policy rate is a bigger influencer of our policy rate than normal,” Medalla added.
Weeks before the Nov. 17 Monetary Board policy meeting, Medalla has communicated early on that they will raise the reverse repurchase rate or the RRP by 75 bps.
Medalla on Thursday said this will probably be the last time that the BSP will do a big rate increase. The recent 75 bps rate adjustment is the second one, the first was an off-cyle move last July.
The BSP has jacked up the rates by a cumulative 300 bps to battle high inflation and exchange rate pressures. As of end-October, the inflation rate averaged at 5.4 percent. For the rest of the year, the BSP forecasts inflation to exit at 5.8 percent. Medalla said inflation will peak in November or December but it will not likely breach eight percent. In October, inflation climbed to a 14-year high of 7.7 percent from 6.9 percent in September
The last time the RRP rate was at five percent was on Jan. 29, 2009, before the interest rate corridor system was implemented in 2016, which adjusted the monetary policy transmission to bring market rates closer to the BSP rate.
Medalla said the US Fed is now signalling that they could increase funds rate in smaller doses after four 75 bps in a row. This could temper the US dollar’s strength in favor of regional currencies, especially the peso which has lost P8.1 or 15.7 percent last Sept. 29 when it depreciated to its record lowest of P59 versus the end-2021 closing rate of P50.99.
The last two rate increases on Sept. 22 and Nov. 17 were essentially responses to what the US Fed did.
The BSP initially increased the rates gradually from a two percent flat rate since November 2020. It started with two 25 bps adjustment on May 19 and June 23, followed by a surprised 75 bps off-cycle move on July 14. The fourth and fifth rate hikes were 50 bps each on Aug. 18 and Sept. 22, followed by a 75 bps increase on Nov. 17. The next and last Monetary Board policy meeting for the year is on Dec. 15.
Since price stability is a key BSP mandate, the six in a row policy rate increases are intended to bring back the inflation path to within the two percent to four percent target range by 2024.
The BSP expects inflation will stay above-the-target in the near term amid broadening price pressures and second-round effects but will be closer to three percent than four percent by the second half of 2023.