Philippines – Medalla: Inflation, Fed to influence policy

INFLATION data due to be released in two weeks, as well as the outcome of the US Federal Reserve’s (Fed) final meeting for the year will determine the Monetary Board’s next moves, Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla said on Tuesday.

“Well, it depends on what the US does. It depends on what the inflation numbers are,” Medalla told reporters when asked about the next steps the Philippine monetary authorities were considering to rein in inflation and support the peso.

The Monetary Board ordered key interest rates to be raised by 75 basis points (bps) last November 17, matching a November 2 Fed decision. The US central bank, which embarked on one of its fastest rate-tightening campaigns early this year to combat inflation, is expected to deliver a 50-bps increase on December 14 after consumer price growth slowed in October.

In the Philippines, inflation hit a near-14-year peak of 7.7 percent in October and is expected to go even higher before the year ends. November data will be released by the Philippine Statistics Authority on December 6.

The Monetary Board next meets on December 14 and Medalla said “we’re going to wait what the US is going to do to address the inflation situation.”

He believes the Fed will again raise its policy rate “but [by] no more 75 bps, so that will be a lot less painful to our economic activity… the outlook is that maybe the US will just [settle] with 50,” which the Philippine monetary authorities will match to prevent an “undesirably volatile peso.”

The peso, which fell to a record low of P59 to the dollar last month, has been relatively stable over the past weeks. It closed at P57.375:$1 on Tuesday, down one-and-a-half centavos.

This is not the first time that Medalla has declared that BSP rates would rise in line with the Fed’s. He has expressed a preference for a 100-bps differential, which means a 50-bps increase that would push the federal funds rate to 4.25 to 4.5 percent would require the BSP policy rate to hit 5.5 percent.