The Bangko Sentral ng Pilipinas said it is ready use the “full force” of monetary policy measures to combat inflation and support the peso currency after the US Federal Reserve hiked rates by 75 basis points.
Felipe Medalla, BSP Governor, said the economy’s “robust” growth prospects “continue to provide enough room for further tightening” of policy.
Medalla said the central bank was prepared to “manage spillover effects,” from higher US rates, including weakening of the peso, which if left unchecked could help push prices higher.
“The BSP is prepared to utilize the full force of available measures in order to address the potential risks to Philippine inflation and inflation expectations arising from an overshooting or excessive depreciation of the Philippine peso,’ Medalla said in a statement.
Medalla has ruled out another off-cycle rate increase after a surprise 75 basis points hike in July which followed back-to-back 25 basis points hikes in May and June, but he hinted at further tightening at its August 18 meeting.
The central bank’s reverse repurchase facility rate is currently at 3.25 percent.
“The BSP stands ready to take all necessary monetary policy action to bring inflation back toward a target-consistent path over the medium term,” Medalla said, adding future policy decisions will be data-dependent.
Bank of the Philippine Islands, meanwhile, said BSP’s off-cycle rate hike managed to calm the peso’s drop as it signaled monetary officials’ willingness to be flexible under the current environment.
Emilio Neri, Jr., BPI lead economist, said the peso may now even have a chance to recover lost grounds after the rate hike.
“If the BSP had been a little bit more flexible earlier this year, maybe did a 50 bp hike when the US did a 75, maybe we will not be as low as 56. I mean, fundamentally, because of the current account deficit, we should really be depreciating but 54 would have been already fair. But because of the late reaction of the BSP, and the consequence of that has been for us to go much lower,” he said.
Marco Javier, BPI lead market strategist for global markets, said the peso’s exchange rate vis-a-vis the dollar will depend greatly on the two country’s interest rate differential.
“So we’re probably looking around to see a 55-55.50 range. Again, they are still compelled to hike probably some more, about 75 to 100 basis points for this year to maintain that interest rate differential,” he said.
“But for the medium term, we still think it’s going to be pressured as importation continues to recover. And if we are going to take in more capital goods to improve our competitiveness there will still be some pressure on the peso to depreciate moving forward,” he added.
BPI said the BSP’s shift from it’s a gradualist tone to a more flexible guidance on the size and timing of future policy decisions appears to have led to a better alignment of the peso’s decline against the dollar.
“By staying flexible, BSP gives confidence to the markets that our foreign currency buffers will remain more than adequate to cover our growing import requirements for wheat, coal, fertilizer and oil,” it said.
“Most leading indicators of growth and prices in major economies point to the prospect of persistently elevated prices in US and Europe which will likely require a series of additional moderate rate hikes from the FOMC (Federal Open Market Committee) through early 2023.
In this context, we believe the BSP will need to raise the interest rates toward 4.25 percent at the end of this year and towards 4.75 percent through mid-2023 in order ensure that price stability remains conducive to growth,” it added.
BPI said the BSP’s rate hikes through 2023 are not expected to have a meaningful negative impact on economic growth. –Reuters and Ruelle Castro
