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Philippines: BSP to match Fed move, slates 75-bps rate hike
MANILA, Philippines — The Bangko Sentral ng Pilipinas is raising key policy rates by a huge 75 basis points (bps), matching the aggressive hike delivered by the US Federal Reserve, as a preemptive move to prevent the peso from depreciating further before the scheduled rate-setting meeting of the BSP two weeks from now.
In a Viber message to reporters, BSP Governor Felipe Medalla said the second 75-basis-point hike would be effective after the rate-setting meeting scheduled on Nov. 17.
“As expected, the Fed increased its policy rate this morning by 75 basis points. This supports the BSP’s stance to hike its policy rate by the same amount in its next policy meeting on Nov. 17,” he said.
In line with its price stability mandate and the need to temper any impact on the country’s exchange rate of the most recent Fed rate hike, Medalla said the BSP deems it necessary to maintain the interest rate differential prevailing before the most recent Fed rate hike.
“By matching the Fed’s rate hike, the BSP reiterates its strong commitment to its mandate of maintaining price stability by aggressively dealing with inflationary pressures stemming from local and global factors,” the BSP chief said.
The BSP has so far raised interest rates by 225 bps, bringing the overnight reverse repurchase rate to 4.25 percent from an all-time low of two percent, to tame inflation and stabilize the peso.
The central bank started its interest rate liftoff on May 19 with a 25-basis-point hike, followed by another 25 bps on June 23.
With the steep depreciation of the peso, the BSP delivered a huge 75-basis-point hike in a surprise off-cycle rate-setting meeting on July 14.
This was followed by a 50-basis-point hike in August and another increase of 50 bps on Sept. 23.
With the additional rate increase, the benchmark would hit five percent.
According to Medalla, the BSP remains vigilant in monitoring all risks to the inflation outlook and is prepared to take the necessary policy actions to bring inflation toward a target-consistent path, wherein the average year-on-year headline inflation will be within the target band of two to four percent in the second half of 2023 and in the full year of 2024.
Based on its latest assessment, the Monetary Board sees inflation averaging 5.6 percent for this year and 4.1 percent for next year.
For 2024, the BSP sees inflation averaging three percent.
Inflation averaged 5.1 percent from January to September, exceeding the BSP’s two to four percent target range, after accelerating to 6.9 percent in September.
The BSP earlier said inflation for October likely accelerated to a range of 7.1 to 7.9 percent.
Jun Neri, lead economist at Bank of the Philippine Islands, said it is a good move to reassure markets that they are doing what’s necessary to anchor inflationary expectations and to supplement their foreign exchange market interventions with policy rate adjustments.
According to Neri, a 4.75 percent policy rate may still not be restrictive enough to slow lending in the coming months after growing at a faster rate of 13.4 percent in September.
“Most consumer-related credit have a fixed rate so they aren’t affected by the hikes. Inflation hitting a 14-year high is what could erode consumer confidence, potentially slowing the pace of credit growth,” Neri said.
The economist of the Ayala-led bank said the rate hikes so far this year have merely normalized policy settings and are not likely to pare growth by much. “It’s a different story altogether for financial markets, overleveraged corporates, and government debt dynamics,” Neri said.
“If the Marcos administration is able to carry out meaningful reforms to boost investor confidence, I don’t see why a slightly higher interest rates can stymie the Philippine economy’s growth recovery,” he said.
According to Neri, it is premature to worry about higher policy settings until the policy rate starts to approach the economy’s nominal gross domestic product growth rate.
Domini Velasquez, chief economist at China Bank, said the BSP is expected to follow the Fed’s movement with a 75-basis-point hike this month.
“The statement of Governor Medalla before markets opened, giving certainty on the size of the rate hike on Nov. 17, likely tried to preempt the foreign exchange market from reacting, for example the peso depreciating before the monetary board meeting,” Velasquez said.
After hitting an all-time low of 59 to $1 several times last month, the peso bounced back to the 57 to $1 closing at 57.97 on the last Oct. 28, the strongest since closing at 57.48 last Sept. 20.
The recovery was short-lived as it again depreciated back to the 58 to $1 level on Wednesday.
The US Fed approved a fourth-straight rate hike of 75 basis points as part of its aggressive battle to bring down the red-hot inflation plaguing the US economy.
The supersized hike brings the central bank’s benchmark lending rate to a new target range of 3.75 to four percent, the highest since January 2008.
Velasquez said crucial in US Fed chairman Jerome Powell’s statement is that they see the terminal rate of the US higher than the September meeting.
“The BSP will need to increase policy rates until next year if they will maintain the 100-basis-point interest rate differential,” Velasquez said.
ING Bank senior economist Nicholas Mapa said the BSP governor has telegraphed his preference to match Fed rate hikes from hereon to maintain a 100-basis-point spread over the Fed funds rate.
“As such, market had priced in a 75-basis-point rate increase at his next meeting,” he said.
According to Mapa, the commitment to increasing rates validates this forward guidance and should steady the peso even if the actual differential is now only 25 basis points. “Credibility apparently is just as valuable as actual differentials.,” he added.
As a follow up, the BSP Monetary Board is seen further raising interest rates by another 50 basis points on Dec. 15.
“We expect Medalla to match the Fed’s projected 50-basis-point rate increase in December, taking RRP to 5.5 percent by year end,” Mapa said.
Source: https://www.philstar.com/business/2022/11/04/2221483/bsp-match-fed-move-slates-75-bps-rate-hike