Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the Monetary Board will definitely raise the policy rate next week, either a low of 25 basis points (bps) or as much as 50 bps.
Medalla told Bloomberg TV on Friday, Dec. 2, that they may also decide on a terminal or peak rate within the first half of 2023, following the US Federal Reserve’s recent pronouncements of decreasing the pace of interest rate hikes after four “jumbo” 75 bps increase. This implies the BSP rate could exceed six percent by the first quarter of next year.
The BSP had to mirror US actions and lifted its own benchmark rate by 300 bps as of Nov. 17. The next policy meeting is on Dec. 15.
At the same time, the BSP chief also disclosed that perhaps by the fourth quarter of 2023, the Monetary Board may decide to start loosening its policy settings and start cutting the overnight borrowing rate.
Medalla said the worse case scenario for the US Fed is 50 bps and several 25 bps rate increases. For the central bank, he said there may be no more rate hikes in the third and fourth quarters next year – “and even possibly a reduction later in fourth quarter 2023.”
He expressed some relief that the US interest rates’ increases are somewhat winding down.
“We were already planning to raise because two percent is a very anti-covid policy, but we ended up raising a lot more than we expected because of what happened to the US and inflation was also quite high. So it’s a relief that (while) theres still increases, but no more jumbos,” said Medalla. The BSP kept a low rate of two percent from November 2020 until May 19 this year.
As for the Dec. 15 policy decision, Medalla said that “certainly we will not do zero and I cannot speak for the rest of the board, but I think the board members will probably be split whether doing 25 or 50.”
The BSP’s rate increases are both to control inflation and to ensure the exchange rate will be stable. At the moment, the peso vis-à-vis the US dollar has somewhat stabilized at the P56 level. Its lowest rate was P59 last Sept. 29.
Medalla said there are days now when the BSP is buying US dollars compared to the past months’ selling.
The BSP chief also reiterated that, despite high inflation and a depreciated peso, the economy may still do well in 2023.
“The reason I’m optimistic is (there’s) a lot of capital expenditures. Both private and public (spending) were postponed because of the lockdowns of the pandemic. Now they’re catching up,” said Medalla. He also cited the recovery of domestic tourism which will further boost growth.
“Our main worry is if we’re growing faster than our neighbors, our exports will be growing at a lower rate than our imports. So the question there is whether the current account deficit is financeable. So far it is,” he said.
Meantime, Medalla said the biggest risk for the Philippine economy in 2023 is another supply shock wherever it comes from. “(But) my source of optimism is that if the supply shocks last only three months, inflation will be back to normal in 15 weeks. That’s what the data says,” he said.
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 two BSP 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. 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.