BSP delivers its biggest rate hike ever

By Keisha B. Ta-asan

THE BANGKO SENTRAL ng Pilipinas (BSP) unexpectedly raised its benchmark interest rates by 75 basis points (bps) on Thursday, but left the door open for further tightening as it seeks to tame the fastest inflation in nearly four years.

BSP Governor Felipe M. Medalla said the Monetary Board raised its key rate to 3.25%, effective immediately, which brought back the rate to the March 2020 level. This latest move is the BSP’s biggest rate hike ever.

Rates on the overnight deposit and lending facilities were also hiked by 75 bps to 2.75% and 3.75%, respectively. 

“In raising the policy interest rate anew, the Monetary Board recognized that a significant further tightening of monetary policy was warranted by signs of sustained and broadening price pressures amid the ongoing normalization of monetary policy settings,” Mr. Medalla said in a Facebook Live on Thursday morning.

The BSP’s surprise move came ahead of its regular policy meeting scheduled on Aug. 18, and follows two 25-bp rate hikes each in May and June. The Monetary Board has raised benchmark interest rates by a total of 125 bps so far this year.

This was also the central bank’s first off-cycle move since April 16, 2020, when it cut rates by 50 bps to 2.75% to support the pandemic-hit economy.

“By taking urgent action, the Monetary Board aims to anchor inflation expectations further and temper mounting risks to the inflation outlook. In particular, policy action is intended to help manage spillovers from other countries that could potentially disanchor inflation expectations,” Mr. Medalla said.

The BSP is ready “to take further necessary actions to steer inflation towards a target-consistent path over the medium term,” he added.

Mr. Medalla said the BSP will still hold a policy meeting on Aug. 18.

Inflation rose by 6.1% year on year in June, the fastest in nearly four years and exceeded the central bank’s 2-4% target band for a third straight month. The average inflation rate in the first six months is 4.4%, still below the BSP’s full-year forecast of 5%.

BSP Deputy Governor Francisco G. Dakila, Jr. said any revisions on inflation targets will be done in the Aug. 18 meeting.

“It is because, again, we would want to incorporate the latest data… the updated numbers on inflation, as well as inflation expectations and on GDP (gross domestic product) growth,” he said.

The Philippine Statistics Authority (PSA) is scheduled to release July inflation data on Aug. 5, and second-quarter GDP data on Aug. 9.

Mr. Dakila said the initial results of the BSP’s partial survey of private sector economists showed higher mean inflation forecasts for this year (5.4% from 4.9% previously) and 2023 (4.4% from 3.9% previously).

The policy move should help temper the risks to the inflation outlook, he said.

Also, the BSP intends to cut the reserve requirement ratio (RRR) to single digits.

“The adjustments in the reserve requirements are meant to be not indicative of any change in the monetary policy stance but it will be an operational adjustment,” Mr. Dakila said.

Cutting the RRR would give banks more money to lend and reduce the cash holdings that they keep in their vaults as standby funds that do not generate returns.

ECONOMIC OUTLOOK
Mr. Medalla also said the favorable growth conditions this year “suggests that the domestic economy can accommodate a further tightening of monetary policy.”

In a separate statement, Finance Secretary Benjamin E. Diokno said the Philippine economy is robust enough to absorb the policy rate hike.

“The growth outlook is seen to be supported by the maintenance of loosened quarantine restrictions as well as the positive impact of structural reforms… The National Government will continue to adopt a gradual and calibrated path of fiscal consolidation to help preserve the strong growth momentum,” Mr. Diokno, a former BSP governor, said.

The economy expanded by a faster-than-expected 8.3% in the first quarter. The Development Budget Coordination Committee (DBCC) is targeting 6.5-7.5% GDP growth this year.

BSP’s Mr. Dakila said the GDP targets for this year are achievable, adding that second-quarter growth is “very likely to be strong or may even be stronger than the first-quarter numbers.”

While GDP may slow down a bit due to higher interest rates, Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said “it might be worse if inflation goes up further.”

“The economy managed to grow by 6.3% and 6.1% in 2018 and 2019 even if the policy rate was above 4%. A prolonged period of high inflation will eventually hurt consumers, which will likely affect the economy more severely compared to higher interest rates,” Mr. Neri said in a statement.

Former BSP Deputy Governor Diwa C. Guinigundo said he was not surprised that the central bank came out “appropriately aggressive in an off-cycle meeting.”

“It’s timely for the BSP to focus on stabilizing inflation and the exchange rate because both would also affect market rates. Uncertainty as to the direction of policy when inflation is hitting historic highs and the peso is performing poorly could also push interest rates and consequently debt servicing costs,” he said in a Viber message.

MORE RATE HIKES
The central bank may increase policy rates further this year as it continues its fight against inflation, ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail note.

“BSP Governor Medalla will need to sustain the recent hawkish rhetoric to re-anchor inflation expectations and establish the bank’s commitment to fighting inflation,” Mr. Mapa said.

“We expect BSP to hike again at least one more time in 3Q with the possibility of further tightening should inflation continue to remain stubbornly high. The peso will get an immediate reprieve in the short term but chronic trade deficits could mean that any rally in the currency may be capped,” he added.   

Makoto Tsuchiya, assistant economist at Oxford Economics, said the BSP may raise rates by 50 bps at the August meeting to end the year at 3.75%. Inflation is expected to peak above 8% in the fourth quarter, averaging 5.9% for the year, he added.

“But if the (Philippine peso) were to depreciate sharply from here or inflation surprised on the upside, this would justify further tightening this year. For now, we expect that with global trade set to slow and a negative output gap, the BSP will be conscious to not stifle the recovery in domestic demand,” he said in a note.

PESO RECOVERS
The Philippine peso, which had hit a record low early this week versus the US dollar, recovered some lost ground.

The local unit closed at P56.15 per dollar on Thursday, gaining 11 centavos from its P56.26 finish on Wednesday, based on Bankers Association of the Philippines data.

Year to date, the local unit has weakened by 10.09% or by P5.15 from its close of P51 versus the dollar on Dec. 31, 2021.

The peso is the worst-performing currency in Southeast Asia this year as the greenback continues to strengthen on expectations for faster Federal Reserve policy tightening.

The Fed is seen stepping up its tightening campaign with a supersized 100-basis-point rate hike this month after a report showed inflation racing at four-decade highs.

The BSP’s move was meant to support or at least stabilize the peso exchange rate, said Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp. in Manila.

A weak peso adds further pressure on inflation, threatening to derail recovery of the consumption-driven domestic economy.

“More rate hikes are still possible, if needed, as a function of any further Fed rate hikes to bring down elevated inflation,” Mr. Ricafort said. — with Reuters