The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, surprised the market on Thursday morning by raising the benchmark policy interest rate by 75 basis points to 3.25 percent to contain inflation and support the value of the peso.
“The Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase facility by 75 basis points to 3.25 percent, effective 14 July 2022,” BSP Governor Felipe Medalla said in a Facebook live statement on the off-cycle move.
It also raised the interest rates on the overnight deposit and lending facilities to 2.75 percent and 3.75 percent, respectively. The rate hike was the third time this year.
Former East West Banking Corp. president and now vice chairman Antonio Moncupa said the 75-bps rate hike sent a very strong signal that the BSP was dead serious in its intention to control inflation. “For now, I think it is a good thing. The peso will appreciate and discourage unnecessary buying of foreign exchange. What I’m trying to figure out is after the initial shock, what will happen? I will not be surprised if there will be volatility as the market debates the consequences,” said Moncupa.
The peso slightly recovered to 56.15 against the US dollar Thursday from 56.26 Wednesday. Oxford Economics said the peso was under pressure amid a narrowing interest rate differential with the US. “As we forecast the US Fed to raise rates by a further 200bp this year, we expect the peso to remain under pressure. The BSP’s concern is that the peso depreciates sharply from here, as it estimates that a 1-percent depreciation in the peso adds 0.5-1 percentage point to inflation,” it said.
Medalla said that 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.”
“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,” Medalla said.
Inflation in June 2022 accelerated to a 43-month high of 6.1 percent from 3.7 percent a year ago, driven by higher prices of food, non-alcoholic beverages and transport fares, the Philippine Statistics Authority said.
“The BSP reassures the public of its unwavering commitment and readiness to take further necessary actions to steer inflation towards a target-consistent path over the medium term in keeping with its price stability mandate,” he said.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said the surprise hike by the Monetary Board was “meant to support or at least stabilize the peso exchange rate, as part of their toolkit related to the exchange rate vis-a-vis the inflation-targeting framework since 2001 and the price stability mandate.”
“This is a pre-emptive move on a possible large Fed rate hike of 0.75 to 1.00 to 2.50 percent to 2.75 percent [upper range of the Fed target] on the next Fed/FOMC rate-setting meeting on July 27, 2022,” Ricafort said.
“Any further local policy rate hikes would also be a function of how the peso exchange rate behaves,” Ricafort said.
Ricafort said, however, higher local policy rates would increase the borrowing costs/financing costs of consumers, businesses, government and other institutions.
ING Bank Manila senior economist Nicholas Mapa said that following the release of US inflation report of 9.1 percent in June and decisive tightening from central banks in the region, “the BSP may have felt that forceful action was needed immediately to re-anchor inflation expectations and to steady a battered currency.”
Mapa said with inflation expected to sustain its ascent, the BSP might be busy in the next few policy meetings as well.
“BSP Governor Medalla will need to sustain the recent hawkish rhetoric to re-anchor inflation expectations and establish commitment to fighting inflation,” he said.
Mapa said he was expecting the BSP to adjust the rates at least one more time in the third quarter with the possibility of further tightening if inflation continues to remain stubbornly high.
“The Philippine peso will get an immediate reprieve in the short term but chronic trade deficits could mean that any peso rally may be capped,” Mapa said.
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