August rate hike still possible — BSP chief Medalla

Inflation currently stood at 6.1% in June, highest since the pandemic brought the domestic economy to its knees back in 2020.
Walter Bollozos, file

MANILA, Philippines — There’s still a possibility that the Bangko Sentral ng Pilipinas would hike rates in August even after the surprise 75-basis point increase this week, Governor Felipe Medalla said Friday.

Sustaining a hawkish tone to calm Filipinos and the market as inflation fears grip, Medalla told Bloomberg that monetary authorities “will not rule out another hike in August.”

But he said “the need to do 50 (basis-point hike) in August is much, much less now.”

“I think we still have some room to raise depending on the inflation picture,” Medalla added. “The key to us is to increase the chances that we will have below 4% inflation next year.”

Ahead of its August 18 meeting, the BSP on Thursday hiked its policy rate to 3.25% to “anchor inflation expectations further and temper mounting risks to the inflation outlook.” Government data showed inflation rose to 6.1% in June, the highest in more than three years and soaring past the government’s 2-4% target.

In particular, the BSP said the surprise policy action was “intended to help manage spillovers from other countries that could potentially disanchor inflation expectations."

“The spillover effects from other countries were just too large,” Medalla said. “If you’re sure you’re gonna move a lot in August, might as well do it now.”

On Friday, an official of the US Federal Reserve Board expressed support for a full percentage point hike amid scorching inflation stateside, a move the would likely add more strength to the US dollar and weigh on emerging market currencies like the Philippine peso.

Medalla, who previously argued that there was no need to match the Fed’s aggressive actions, said the BSP expects the US central bank to hike by “at least 75 bps” later this month.

“We are acting on the basis of what is already happening and what we expect to happen,” the BSP boss said. “We care about exchange rate only when it’s overshooting -- when it’s adding to problems.”

‘Overkill’

But UK-based think tank Pantheon Economics believes BSP’s tightening cycle may be over now, even arguing that the off-cycle rate hike last Thursday was an "overkill."

Before the unexpected rate increase, Pantheon had projected two more 25-bp hikes in 2023, which could have left the benchmark rate used by banks at 3%.

"The out-of-cycle 75bp salvo simply is overkill," Miguel Chanco, Pantheon's chief Emerging Asia economist, said in an emailed commentary.

"The only difference now is that we think that the Bank’s hiking cycle is over, with 2023 unlikely to see any additional increases,” he added. "Remember that the recovery remains very uneven, with capital expenditures still well below the pre-Covid level and likely to be hit hardest by rising rates.”

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