BSP has space to tweak rates – BPI
The strong economic growth allows the Bangko Sentral ng Pilipinas (BSP) the leeway to adjust or keep benchmark rates steady to rein in inflation more effectively, according to a local bank’s research unit.
“Given the strong GDP (gross domestic product) number, the BSP has the space to adjust its policy rate further and continue the fight against inflation,” according to analysts from Ayala-owned Bank of the Philippine Islands (BPI) in a commentary Thursday, Jan. 26, after the government’s announcement of a higher-than-projected 7.6 percent 2022 growth.
But, BPI analysts said that if the BSP’s Monetary Board decides to pause its interest rate hikes sometime this year, the strong GDP “gives them the chance to keep interest rates steady at elevated levels while building up their GIR (gross international reserves) again.”
“This will also allow them to cut the RRR (reserve requirement ratio) further and refine their market-based monetary policy tools while maintaining stability in the financial system,” said BPI.
To balance inflation expectations and economic recovery, and to temper exchange rate pressures while at the same time ensuring growth momentum post-pandemic is intact, the BSP kept a decent rate differential between US rates and central bank rates.
It raised the policy rates by a cumulative 350 basis points (bps) in 2022 to make sure inflation will return to within the target of two percent to four percent this year. BSP Governor Felipe M. Medalla said they could raise the key rate by another 50 bps or more in February and March.
In 2022 inflation averaged at 5.8 percent. For this year, the BSP expects 4.5 percent inflation while private sector economists in a survey conducted by the BSP, have a higher forecast of 5.1 percent.
Both the BSP and the private sector analysts however have lower forecast for 2024 which could be attributed to the further easing in oil prices, the peso appreciation, and lower domestic growth outlook following the cumulative policy rate adjustments of the BSP.
Meanwhile, Medalla said it is possible to reduce the RRR within the first six months of 2023. RRRs are required reserves that applies to demand deposits, savings deposits and time deposits. Changes in reserve requirements have a significant effect on money supply and inflation.
BPI said peso vis-à-vis the US dollar has more strength to show. It has regained lost grounds from P59 in October last year to the P54-level this month, following the BSP’s release of significant dollar liquidity.
Still, with the country’s improving demand, the bank said the peso “may continue to weaken in the near term given sizeable import requirements to stabilize prices.”
“But the behavior of the local currency in 2023 may largely depend on what the Federal Reserve will do. If a recession in the US happens, the US central bank may cut interest rates eventually. This will diminish the strength of the US dollar and provide support to other currencies like the peso. In this situation, the appreciation of the local currency will likely be smaller compared to other currencies given the substantial current account deficit of the Philippines,” said BPI.