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Philippines: BSP under pressure to hike rates further
Rising inflation, weakening peso
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may consider more aggressive rate hikes in August than the signaled 25-basis-point gradual increase amid concerns of quickening inflation and depreciating peso.
BSP Governor Felipe Medalla told reporters the central bank’s Monetary Board may consider bigger rate hikes to anchor inflation expectations and support the local currency against the greenback.
Medalla earlier said he prefers a gradualism approach in tightening by hiking rates by 25 basis points (bps).
Economists have been pushing for a more aggressive 50-bps rate hike as the Philippines is falling behind the curve as central banks in advanced economies pursue a more hawkish stance.
The BSP started raising its policy rates on May 19 after it delivered a 25-bps rate hike, the first in more than three years or since November 2018. The Monetary Board raised interest rates anew by another 25 bps last June 23.
The back-to-back rate hikes brought the benchmark rate to 2.50 percent from an all-time low of two percent. As part of its COVID-19 response measures, the central bank slashed interest rates by 200 bps in 2020.
Medalla said monetary authorities would remain data dependent in setting the country’s monetary policy stance.
“So the key really is, what’s the momentum of inflation? So of course our ability to hit less than four percent next year, we will need lots of love because interest rates, to begin with, the cost of the inflation in supply, interest rates will not change supply prices,” the BSP chief said.
According to Medalla, there is a need to bring down month-on-month inflation to a range of 0.2 to 0.3 percentage point from about 0.7 percentage point as of end-May.
Seasonally adjusted consumer price index eased to 0.5 percent in May from one percent in April and March.
“The 0.7 (percentage point) looks small, but if that goes on for 12 months, that’s 8.4 percent. That is why I always look at month-on-month,” Medalla said.
He said another month of seasonally adjusted inflation of 0.7 percent is scary.
“If its momentum will be so strong, then it may have already second order effects. What is difficult is if inflation becomes embedded, it becomes a self-fulfilling prophecy. I expect prices to rise, therefore, I will raise my price,” Medalla said.
He said monetary authorities are also interested in the exchange rate only in so far as it is a major input to inflation.
“A very, very large change in exchange rate will affect inflation,” the BSP chief said.
Medalla reiterated that the BSP need not match the tightening by the US Federal Reserve, which delivered its biggest hike since 1994 after raising key policy rates by 75 bps last June 15.
“I’m saying though that certainly not going to one for one, we don’t have to match it. But on the other hand, you cannot claim it’s zero because if the exchange rate moves too much, really it will affect inflation,” Medalla said.
According to the new BSP chief, the weakening can be traced to the huge adjustment to the projected current account deficit due to strong imports amid the continued reopening of the economy.
Source: https://www.philstar.com/business/2022/07/01/2192104/bsp-under-pressure-hike-rates-further