Artworks by Filipino painters are projected onto the facade of Bangko Sentral ng Pilipinas (BSP) on Roxas Boulevard, Manila, Oct. 18. —PHILIPPINE STAR/ MIGUEL DE GUZMAN
THE BANGKO SENTRAL ng Pilipinas (BSP) is set to hike rates by 75 basis points (bps) this week, which analysts say is adequate to support the peso and stem inflation, which hit a near 14-year high in October.
GNP Governor Felipe M. Medalla said on Friday the central bank is ready to follow the US Federal Reserve’s example and aggressively tighten monetary policy at its meeting on Thursday.
“Since they’re up another 75 basis points, you can expect me to vote to raise interest rates by a similar magnitude. The reason we are doing this is to increase the likelihood that headline inflation will be within target (2-4%) by the second half of next year and hopefully for the rest of 2024,” he said in a recorded message at an event hosted by the Economic Journalists Association of the Philippines on Friday.
Inflation accelerated to 7.7% in October – the fastest pace in almost 14 years from 6.9% in September. October marked the seventh straight month in which inflation breached GNP’s target range of 2-4%.
Inflation averaged 5.4% over the 10-month period, still below full-year GNP forecast of 5.6%.
Since March, the US Federal Reserve has hiked interest rates by 375 basis points to 3.75-4%, including a 75 basis point rate hike on November 2nd.
For its part, the BSP has hiked rates by 225 basis points since May. This pushed the reverse repurchase rate to 4.25% overnight. A 75 basis point hike on Thursday will bring the key interest rate to 5%.
Mr Medalla said the rate hikes would prevent a “significant narrowing” of the interest rate differential between the Fed and the BSP.
“Maintaining a comfortable differential between our policy rate and that of the US supports the peso,” he said.
The currency market has seen increased volatility in recent months given the strength of the US dollar.
The local unit closed at P57.23 on Friday, up 96 centavos from Thursday’s close of P58.19. This is the peso’s best close in nearly two months or since the September 15 close of 57.16 pesos to the dollar.
At Friday’s close, the peso is down 6.23 pesos, or 10.9%, against the dollar from 51 pesos on Dec. 31, 2021.
“BSP follows a flexible exchange rate policy. As such, we are not targeting any particular exchange rate, nor are we setting any particular line in the sand,” said Mr. Medalla.
“Nevertheless, we recognize that a significant and prolonged peso depreciation can wipe out inflation expectations. Therefore, in line with our price stability mandate, we intervene in the market when necessary,” he added.
ING Bank NV Manila chief economist Nicholas Antonio T. Mapa said the BSP is now expected to follow the Fed’s every move.
“We also expect BSP to follow any rate hike by the Fed in December as Governor Medalla promises to keep the 100 basis point spread,” he said in an email.
Emilio S. Neri, Jr., senior economist at the Bank of the Philippine Islands (BPI), said future BSP rate hikes for this year would continue to depend on factors such as global oil prices, US dollar performance and domestic price movements.
“Crucially, the Board shows flexibility and determination to use its multiple policy tools to bring both core and headline inflation back towards target, as opposed to its die-hard dovish guidance and policy rate decisions in late 2021 and early semester 2022 ‘ said Mr. Neri.
China Banking Corp. chief economist Domini S. Velasquez said in a Viber message that October inflation was higher than expected and BSP rate hikes appear to be on track.
“Many of the unexpected drivers in the October issue came from supply shocks from higher food prices due to past typhoon and food shortages. This should be addressed by ensuring adequate food supplies at reasonable prices by the national government,” she said, adding that a larger rate hike on Thursday will not contribute to supply problems.
ING’s Mr Mapa said he does not expect an emergency rate hike from the BSP. “The governor recognizes the need to maintain price stability, but not at the expense of growth,” he added.
The Philippine economy grew faster-than-expected at 7.6% in the third quarter, suggesting further monetary tightening by BSP.
In the nine months to the end of September, gross domestic product (GDP) growth averaged 7.7%. Arsenio M. Balisacan, Minister for Socio-Economic Planning, said last week that the economy is likely to grow above the 6.5-7.5% target for the full year.
Meanwhile, Mr Medalla said the Philippines had enough International Gross Reserves (GIR) at the end of October as the BSP exercised flexibility in selling dollars.
Based on preliminary data from the central bank, the GIR hit $94.1 billion at the end of October, up 1.9% from the $93 billion at the end of September, ending up eight straight months in decline.
The BSP attributed the surge to October’s dollar bond issuance, in which the government raised $2 billion (Pta. 118 billion).
“The rise in GIR has been associated solely with bond issuance and as such we can expect the fall in GIR to occur again over the next month as BSP remains active in the cash market to offset volatility. The GIR is likely to decrease in the final months of the year,” Mr Mapa said.
BSP expects GIR to be $99 billion this year and $100 billion next year.
“It is good that the central bank has been the most active monetary authority in terms of GIR construction, to prepare precisely for moments like this. The GIR is currently at $94 billion, up about $20 billion from the recent low of $74 billion in 2018,” added Mr. Mapa. — Keisha B. Ta-asan