BSP braces for another jumbo rate hike to keep up with aggressive Fed

Ramon Royandoyan –

November 3, 2022 | 10:42 a.m

MANILA, Philippines – The Bangko Sentral ng Pilipinas is preparing for another outsized rate hike at its next meeting to accommodate the US Federal Reserve’s recent tightening move.

GNP Governor Felipe Medalla said in a statement Thursday that the central bank will hike rates by 75 basis points after the Monetary Board meets on November 17. That would match the Federal Reserve’s rate hike early Thursday morning.

READ: The Fed delivers another steep rate hike and more to come

If this is realized, it would bring the BSP benchmark interest rate to 5%. The BSP began a series of rate hikes from May to reverse its accommodative monetary policy stance, which has supported credit growth through most of the pandemic.

Medalla said in a statement that BSP is trying to keep pace with the interest rate differential, even ahead of the Fed’s recent rate hike. It looks like the Monetary Board has scheduled two interest rate setting meetings before the end of the year.

“The BSP remains vigilant in monitoring all risks to the inflation outlook and stands ready to take the necessary policy measures to keep inflation on a target-consistent path within the 2-4% target range in the second half of 2023 and for the year as a whole bring by 2024,” the BSP said in a statement.

Central banks everywhere have been hitting the panic button in recent months as they attempt to tame seething inflation in their respective economies by raising interest rates.

In the Philippines, BSP expects inflation to slow in the coming months after forecasting prices for goods and services to rise 7.1-7.9% in October.

By keeping pace with Federal Reserve actions, the BSP would bring some calm to capital markets. The BSP intends to spend $30 billion to prevent the peso from tipping above the P60 mark on a rising dollar.

Domini Velasquez, chief economist at China Banking Corp., said Medalla’s statements ahead of the market opening were made to prevent the peso from depreciating further.

“We had expected GNP to follow the Fed’s move with a 75 basis point hike for November. Gov. Medalla’s statement before the markets opened, which provided certainty about the magnitude of the rate hike on Nov. 17, likely attempted to prevent the FX market from reacting, i.e. devaluing the peso ahead of the Monetary Committee meeting,” she said in a Viber message .

For Nicholas Antonio Mapa, senior economist at ING Bank in Manila, BSP’s statements showed credibility for their part, considering Medalla “long telegraphed to get a point-by-point match.”

“Today, he shows that credibility is as strong as actual rate hikes as PHP has stabilized and outperformed the region even if actual spreads are 25 basis points,” he said in a Viber message.

BSP rate hikes take 6-18 months before the economy feels the effects.

“Key to Powell’s statement is that they see the US final interest rate higher than at their September meeting. BSP needs to raise interest rates until next year if it will keep the 100 basis point interest rate differential,” added Velasquez.

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