Finance Secretary Benjamin E. Diokno believes the Bangko Sentral ng Pilipinas (BSP) should not rush to raise interest rates in response to the recent action taken by the US Federal Reserve.

As a member of the BSP's Monetary Board, Diokno stressed the significance of thoroughly evaluating the effects of the recent adjustment made by the US Fed on the global and domestic economy.

Diokno also said the Monetary Board should take into account various indicators, including inflation, when considering any adjustments to interest rates on Aug. 17.

“I don’t think we have to match. That’s my view,” Diokno told reporters during his weekly Chat with SBED last Friday, July 28.

“We have to monitor the indicators like inflation and what’s the impact of this recent adjustment on the global economic and domestic economy,” he added.

The benchmark overnight interest rate in the US was increased by 25 basis points by its central bank last week, placing it in the range of 5.25 percent to 5.50 percent.

This particular level of interest rates has not been consistently surpassed for approximately 22 years and was last observed just prior to the housing market crash in 2007.

In its June meeting, the BSP’s Monetary Board made the decision to halt its tightening cycle, maintaining the key rate at a level close to the highest it has been in 16 years, at 6.25 percent.

Over the period from May 2022 to March 2023, the BSP has implemented a series of interest rate hikes, totaling 425 basis points, in order to address and control inflation.

Diokno said a narrower interest rate differential between the Philippines and the US does not necessarily cause market concerns.

“There were times also that the Fed rate and local rate [differential] was narrow. If you look at history, there was that episode,” he pointed out.

A narrow interest rate differential with the US Federal Reserve has the potential to reduce the attractiveness of investments in the Philippines for international investors who are seeking higher returns. This could result in a decrease in foreign capital inflow.

Furthermore, this scenario may exert downward pressure on the value of the peso, as investors may opt for currencies with higher interest rates instead, leading to a depreciation of the peso relative to the US dollar.

In October last year, the peso reached its lowest recorded level of P59 against the dollar.

However, BSP Governor Eli M. Remolona previously clarified that the peso's decline last year could be attributed to excessive concerns and apprehensions about currency depreciation that were not in line with the underlying economic fundamentals.