The Bangko Sentral ng Pilipinas said Thursday it is ready to use the “full force” of its available measures to lessen the impact of the latest 75-basis-point hike in policy rate by the US Federal Reserve that aims to control the rising inflation in the world’s biggest economy.
The Fed’s move was second straight 75 bps increase and the fourth rate hike this year, as the US central bank moved aggressively to cool the strongest surge in inflation in more than four decades.
The BSP said in a statement the action of the Fed, along with the tightening of global financial conditions and broadening uncertainty over global growth prospects, “could continue to drive exchange rate movements in emerging market economies, including in the Philippines.”
“In order to manage the spillover effects of such external developments, 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,” the BSP said.
The central bank said it would continue to be guided by its assessment of the domestic and global developments that affect the outlook for inflation and growth.
“Looking ahead, the BSP stands ready to take all necessary monetary policy action to bring inflation back toward a target-consistent path over the medium term. Further monetary policy adjustment will be carried out in the coming months commensurate with the primary objective of preventing inflation from becoming further entrenched,” the BSP said.
It said the Philippines’ robust economic prospects continued to provide enough room for further tightening of the monetary policy stance. But it said future monetary policy decisions would always be guided by data outcomes for the Philippine economy.
The first 75-bps hike by the Fed took place in the middle of June 2022, which boosted the US dollar against global currencies, including the peso.
Fed chairman Jerome Powell told reporters after the Fed’s rate hike on Wednesday that inflation was “much too high,’ adding that another “unusually large increase could be appropriate” at the next meeting.
But Michael Ricafort, chief economist of Rizal Commercial Banking Corp., told Manila Standard the latest 75-bps hike by the Fed has been widely expected and already fully priced in by the markets beforehand.
“In fact, the US dollar already corrected lower vs. major global currencies recently despite the latest Fed rate hike,” Ricafort said.
Ricafort expects the local policy rates to increase by 25 to 50 basis points on the Aug. 18, 2022 meeting of the Monetary Board, “partly supporting the peso exchange rate recently to the strongest in among three weeks.”
Bank of the Philippine Islands said the BSP’s shift from its gradualist tone to a more flexible guidance on the size and timing of future policy decisions appeared to have led to a better alignment of the peso’s decline against the US dollar against its Asian peers.
“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,” BPI said in a report Thursday.
The bank said most leading indicators of growth and prices in major economies pointed to the prospect of persistently elevated prices in US and Europe which would likely require a series of additional moderate rate hikes from the Federal Open Market Committee through early 2023.
“In this context, we believe the BSP will need to raise the RRP 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,” BPI said.
The peso on July 7 pierced the 56-per-dollar boundary. The peso has been retreating against the greenback since the aggressive 0.75-basis point hike in the policy rate by the US Federal Reserve middle of June 2022, the biggest rate increase since 1994.