BSP aligns with Fed move and plans 75 basis point rate hike

MANILA, Philippines — The Bangko Sentral ng Pilipinas hiked interest rates by a whopping 75 basis points (bps), matching the US Federal Reserve’s aggressive hike, as a pre-emptive measure to prevent the peso from depreciating further ahead of the scheduled interest-rate-setting meeting of the GNP in two weeks.

In a Viber message to reporters, BSP Governor Felipe Medalla said the second 75 basis point hike would come into effect after the rate-setting meeting scheduled for Nov. 17.

“As expected, the Fed raised interest rates by 75 basis points this morning. This supports the BSP’s stance of raising its policy rate by the same amount at its next monetary policy meeting on November 17,” he said.

In line with its price stability mandate and the need to cushion any impact of the recent Fed rate hike on the country’s exchange rate, Medalla said the BSP sees a need to maintain the interest rate differential that prevailed before the latest Fed rate hike.

“By adjusting to the Fed’s rate hike, the BSP reaffirms its strong commitment to its mandate to maintain price stability by aggressively dealing with inflationary pressures stemming from local and global factors,” the BSP chief said.

The BSP has hiked interest rates by 225 basis points so far, bringing the overnight reverse repo rate to 4.25 percent from an all-time low of 2 percent in a bid to tame inflation and stabilize the peso.

The central bank started its rate hike on May 19th with a 25 basis point hike, followed by another 25 basis points on June 23rd.

With the peso sharply depreciating, BSP delivered a huge 75 basis point hike in a surprise off-cycle rate setting meeting on July 14th.

This was followed by a 50 basis point raise in August and another 50 basis point raise on September 23rd.

With the additional rate hike, the benchmark would hit 5 percent.

According to Medalla, the BSP remains vigilant in monitoring any risks to the inflation outlook and stands ready to take the necessary policy action to bring inflation onto a target-consistent path where average annual headline inflation will be within the target range of two to four percent in the second half of 2023 and in 2024 as a whole.

According to its latest estimate, the Monetary Board expects inflation to average 5.6 percent this year and 4.1 percent next year.

For 2024, the BSP sees inflation averaging three percent.

Inflation averaged 5.1 percent from January to September, beating GNP’s target range of 2 to 4 percent, after accelerating to 6.9 percent in September.

BSP earlier said October inflation was likely to accelerate to a range of 7.1 to 7.9 percent.

Jun Neri, chief economist at the Bank of the Philippine Islands, said it was a good step to reassure markets that they are doing whatever is necessary to anchor inflation expectations and complement their FX market interventions with policy rate adjustments.

Neri said a policy rate of 4.75 percent 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 loans have a fixed interest rate, so they are not affected by the rate hikes. Inflation hitting a 14-year high could undermine consumer confidence and potentially slow credit growth,” Neri said.

The economist at the Ayala-led bank said rate hikes so far this year have only normalized policy sentiment and are unlikely to dampen growth significantly. “It’s a different story for financial markets, over-leveraged corporations, and the dynamics of government debt,” Neri said.

“If the Marcos administration is able to enact meaningful reforms to boost investor confidence, I don’t see why slightly higher interest rates can hamper the Philippine economy’s growth recovery,” he said.

Neri says it’s premature to worry about higher policy settings until policy rates get closer to the economy’s nominal gross domestic product growth rate.

Domini Velasquez, chief economist at China Bank, said GNP is expected to follow the Fed’s move with a 75 basis point hike this month.

“Governor Medalla’s statement before markets opened, providing certainty about the magnitude of the November 17 rate hike, likely attempted to prevent a foreign exchange market reaction, such as devaluing the peso ahead of the Monetary Committee meeting,” Velasquez said.

After hitting all-time lows of $59-$1 several times over the past month, the peso rallied back to $57-$1 last Oct. 28, closing at 57.97, its strongest since the 57.48 close last September 20th.

The rebound was short-lived as it retreated back to the $58-$1 levels on Wednesday.

The US Federal Reserve approved a fourth straight 75 basis point hike in interest rates as part of its aggressive fight to curb the red-hot inflation plaguing the US economy.

The outsized hike brings the central bank’s interest rate to a new target range of 3.75 to 4 percent, the highest since January 2008.

Velasquez said key in Fed Chair Jerome Powell’s statement was that they see the US terminal interest rate higher than at the September meeting.

“The BSP needs to raise interest rates until next year if it wants to maintain the 100 basis point interest rate differential,” Velasquez said.

ING Bank chief economist Nicholas Mapa said the BSP governor cabled that he preferred to align with Fed rate hikes from now on in order to maintain a 100 basis point spread over the Fed’s benchmark rate.

“Hence, the market had priced in a 75 basis point rate hike at its next meeting,” he said.

According to Mapa, the rate hike commitment confirms this forward guidance and should stabilize the peso, even though the actual spread is now just 25 basis points. “Credibility is apparently just as valuable as genuine differences,” he added.

As a follow-up, the BSP Monetary Board is expected to hike interest rates by another 50 basis points on December 15th.

“We expect Medalla to match the Fed’s forecast 50 basis point rate hike in December and bring the MSRP to 5.5 percent by year-end,” Mapa said.

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