A bank economist said Tuesday the Bangko Sentral ng Pilipinas may be compelled to make another off-cycle interest rate hike this year in the wake of the next Federal Open Market Committee meeting in early November, when another 75-basis-point increase is expected.
Bank of the Philippine Islands lead economist Jun Neri expressed hope the next rate hike by the BSP would not be a repeat of the low rate hike in June when “we were caught between two meetings of the FOMC with a much lower policy rate [adjustment].”
“Because in June, if you remember, the BSP hike [was] by 25 basis points when the FOMC hike [was] 75,” Neri said.
He said before BSP’s scheduled meeting took place in early July, the US inflation was reported to have printed well above expectations, triggering a sharp jump in the peso-dollar exchange rate.
Neri said monetary authorities “were forced to increase by 75 basis points off-cycle.”
The BSP raised the policy rate by another 50 bps to 4.25 percent on Sept. 22 to rein in the elevated inflation rate.
Neri said the US was not only signaling another rate hike of 75 basis points in November, but would continue to increase up to 2023. “It’s higher, faster, longer now for the US,” Neri said, adding that indications were strong they would keep the rates high up to 2024.
Neri said the country’s rate hike was being seen by a number of analysts as dovish, as “almost everywhere in the world the hikes have been more aggressive than expected because of the surprise announcement of FOMC.”
Neri said this was in contrast with the action of Indonesia which was not having a current account problem. “They have a current account surplus in Indonesia, and yet they were conservative enough to hike by 50 basis points,” he said.
Neri said the impact of a weaker peso on inflation in the long run in the face of FOMC being determined to do sustained, higher and faster interest rate hikes.
“That’s a problem because while inflation was your ultimate target, the currency is an intermediate target, because we all know the weaker peso will have an influence on inflation later on,” he said.
“[We are] not catching up with the higher, faster, longer signal of the FOMC. Several foreign banks have already mentioned in reports that we are seen as dovish,” Neri said, citing that a P60 to a dollar exchange rate is “just around the corner.”
Reiterating Indonesia’s decision after hearing the FOMC announcement, Neri said they had to hike by 50 basis points. “In our case, it seems that we focused too much on the 75 basis points and that we needed to do something a little bit more aggressive than that, and hiked by 75 bps or more,” he said.
Neri said that a mild policy rate hike might use up the country’s GIR that fell to a seven-month low.
“The only thing that is preventing a 40-percent, 42-percent depreciation of the peso now, like in 1997, is probably that we have a GIR at seven months, which we have to be careful not to use up,” Neri said, adding that the country has energy and food security issues to contend with.
“Coal prices are at a record high,” he said, citing the Philippines’s 50-percent energy generation is dependent on coal. “Winter is about to come and natural gas in Europe is going to get more expensive and so will coal,” he said.
“If we don’t hike aggressively enough, the seven months [of GIR] can suddenly revert to six months,” he said.