BSP unlikely to move in lockstep with Fed

By Luz Wendy T. Noble, Reporter

THE Bangko Sentral ng Pilipinas (BSP) does not have to follow the US Federal Reserve’s rate hike, but is keeping a close eye on inflation risks, BSP Governor Benjamin E. Diokno said.

“We do not necessarily have to move in pace with the monetary policy adjustments of the US Fed,” Mr. Diokno said at a virtual briefing on Thursday.

“I would like to reiterate that the BSP calibrates its monetary policy settings in response to external developments only to the extent that they influence the outlook on growth and inflation,” he added.

However, a former central bank official and analysts warned that monetary policy tightening by the world’s most powerful central bank while the BSP remains accommodative could mean further peso depreciation and result in a flight to safe-haven assets from emerging markets.

The Fed on Wednesday increased interest rates by a quarter percentage point for the first time since 2018, as it responds to four-decade high inflation in the US. Fed officials also hinted at more hikes coming this year until 2023.

Before the Fed announcement, Mr. Diokno on Wednesday said the BSP would remain patient and was still looking to start adjusting interest rates only by the second half to ensure sustained economic recovery. The first policy review in the second semester is scheduled for June 23.

The BSP has kept policy rates unchanged at a record low of 2% since November 2020.

Former BSP Deputy Governor Diwa C. Guinigundo said the Fed’s move came with officials’ full recognition that US inflation was already too high and labor market was already tight.

He noted the BSP has also assessed a scenario where inflation could reach 4-4.7% if oil prices remain above $120 per barrel on a sustained basis.

“The BSP’s baseline forecast of 3.7% [for 2022] is actually already nearing the upper end of the 2-4% inflation target. That should warrant a monetary policy response especially since economic growth has been alleged to be robust and resilient,” Mr. Guinigundo said in a Viber message.

“Keeping a negative real policy rate has its own financial stability risks that could lead to de-anchored inflation expectations, capital reversal and peso depreciation,” he added.

At its close of P52.14 a dollar on March 17, the peso has weakened by 2.24% from its P50.999 finish at end-2021. It, however, appreciated by 17 centavos from its P52.31 finish on March 16.

Analysts have attributed the peso’s weakness to global developments, including Russia’s invasion of Ukraine, that have pushed investors toward safe-haven currencies.

“Based on the latest Fed dot plot, if BSP opts to delay rate hikes to the second half, the Fed would have hiked three times, with the sound of policy dissonance likely forcing the peso to depreciation levels last seen in 2018,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.

In 2018, the Fed tightened monetary policy, while local inflation reached multi-year highs due to low rice supply. In the same year, the BSP raised interest rates by 175 basis points.

The wider gap between rates in the US and in emerging markets could convince some investors to swap their investments in countries like the Philippines to holdings of safer-haven assets, he said.

“The end result in most cases is that the emerging market currency takes a hit as do the bond or equity markets that enjoyed the support of these investors,” Mr. Mapa added.

While investors may have already likely priced in the Fed’s policy tightening, Mitsubishi UFJ Group Global Markets Research analyst Sophia Ng said geopolitical tensions in Eastern Europe could cause more volatility in emerging markets like the Philippines.

“Ongoing developments in the Ukraine conflict is likely to continue to lead to a pickup in volatility, with risks tilted towards the downside for the peso against the dollar in view of reduced risk appetite and further deterioration of the Philippines’ terms of trade on elevated oil prices,” she said in an e-mail.

Mr. Diokno said the Philippines has various tools to deal with market volatility arising from risks related to potential tightening, such as the flexible exchange rate system and strong external buffers.

Meanwhile, Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said a gradual policy normalization might be necessary to avoid the risks caused by faster inflation on the poorest citizens.

“Nonmonetary measures clearly have their limitations too. We can only do so much to delay transport fare rates and average wage (not minimum wage) increases when inflationary expectations have already been de-anchored by the combination of ultra-accommodative global monetary policy and conflict-driven surge in commodity prices,” he said in a Viber message.

There are petitions to increase the minimum wage and fares as fuel prices continued to surge. Both are signs of possible second-round effects of inflation that the BSP said it would continue to monitor.

Mr. Diokno said other factors that could cause faster inflation include higher global food prices, continued shortage in domestic pork supply and higher fish prices.

On the other hand, factors that could slow inflation include the delays in easing of restriction measures and a weaker-than-expected recovery due to emerging coronavirus variants, he added.

The Monetary Board will have its next policy review on March 24.