BSP seen to follow in Fed’s footsteps

MANILA, Philippines — After the US Fed raised its benchmark rate by 75 basis points, the Bangko Sentral ng Pilipinas (BSP) is expected to respond with a 50-basis-point rate hike to protect the peso from the pressures of monetary tightening abroad.

Ayala-led Bank of the Philippine Islands (BPI) said yesterday the BSP may raise its interest rates by 50 basis points during its policy meeting on June 23.

BPI said the peso is at risk of succumbing to external stress if the BSP pushes through with its initial plan of raising its policy rate by 25 basis points.

BPI warned that the gap between interest rates of the BSP and the US Fed would level by the end of 2022 if the BSP raises its rates by just 25 basis points and the Fed raises its interest rates from 50 basis points to 75 basis points per meeting.

The bank said inflation may worsen under this scenario, as the peso will be pressured by the dollar.

“We now expect a 50-basis-point hike from the BSP in its June meeting given the latest move of the Fed. Hiking the policy rate gradually in contrast to what the Fed is doing may exacerbate the headwinds affecting the Philippine economy,” it said.

“A very narrow gap between the US and local interest rates would likely exert more pressure on the peso, which will eventually translate to more inflation,” the bank said.

BPI said the economy has become sensitive to exchange rate movements, with the government filling in supply gaps by importing products like fuel, pork and rice.

The BSP may be compelled to pursue rate hikes beyond what it plans to do and, in the process, cause volatility in the markets and the economy, BPI cautioned.

Rizal Commercial Banking Corp. chief economist Michael Ricafort also expects the BSP to raise the benchmark rate by 50 basis points in its June meeting. He said the central bank should try to keep a comfortable differential between the domestic interest rates and the US rates.

Ricafort also anticipates the BSP to further tighten its monetary policy for the rest of the year to avert the dilemma faced by some countries wherein their rate differentials are diminishing.

The Fed, struggling to tame inflation, looks to sustain its rate hikes in the months to come.

At present, the difference between the BSP and Fed rates sits at 50 basis points.

The US central bank wants to bring its interest rates to 3.4 percent in 2022 and then to 3.8 percent in 2023.