BSP readies measures to tame rising inflation

MANILA, Philippines — As US central bank unleashes another supersized rate hike By Lawrence Agcaoili The Philippine central bank is prepared to utilize the full force of available measures to manage the spillover effects of external developments, including the decision of the US Federal Reserve to hike interest rates by another 75 basis points.

Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla said the action of the US Fed, along with the tightening of global financial conditions and broadening uncertainty over global growth prospects, could continue to drive exchange rate movements in emerging market economies, including in the Philippines.

“In order to manage the spillover effects of such external developments, the BSP is prepared to utilize the full force of available measures in order to address the potential risks to Philippine inflation and inflation expectations arising from an overshooting or excessive depreciation of the Philippine peso,” Medalla said.

Inflation averaged 4.4 percent in the first half of the year and exceeded the BSP’s two to four percent target range after accelerating to 6.1 percent in June from 5.4 percent in May on soaring oil prices and elevated food prices brought about by the Russia-Ukraine war.

On the other hand, the peso depreciated by almost 10 percent to touch its all-time low of 56.45 to $1 early this month due to the hawkish US Federal Reserve and the strong demand for US dollars on surging imports as the economy continues to reopen.

This prompted the BSP Monetary Board to deliver a huge 75-basis-point rate hike in a surprise off-cycle rate-setting meeting last July 14  to anchor inflation expectations, temper mounting risks to the inflation outlook, and help manage spillovers from other countries that could potentially disanchor inflation expectations.

Together with the back-to-back 25 basis points rate hikes last May 19 and June 23, the central bank has raised the benchmark interest rate by 125 basis points to 3.25 percent from an all-tile low of two percent.

The BSP chief earlier ruled out another huge 75 basis points rate hike and a surprise off-cycle rate-setting meeting.

“Our next meeting is on August, if you are to bet on four numbers: zero, 25 (basis points), 50, and 75. Just like in diving, you can rule out the lowest and the highest,” Medalla said during the Post-SONA Economic Briefing 2022.

According to Medalla, monetary authorities will continue to be guided by its assessment of the domestic and global developments that affect the outlook for inflation and growth.

Looking ahead, Medalla said the central bank stands ready to take all necessary monetary policy action to bring inflation back toward a target-consistent path over the medium term.

“Further monetary policy adjustment will be carried out in the coming months commensurate with the primary objective of preventing inflation from becoming further entrenched. The BSP believes the Philippines’ robust economic prospects continue to provide enough room for further tightening of the monetary policy stance,” Medalla said.

For his part, Bank of the Philippine Islands lead economist Jun Neri said the BSP’s decision to deliver an outsized, unscheduled policy hike last July 14 appears to have calmed down market participants as it signaled an increased willingness of the monetary authorities to limit inflationary expectations and the spread of second round effects that emanated from supply-side shocks.

For one the local currency has appreciated back to the 55 to $1 level after touching the all-time low of 56.45 to $1 a few weeks ago.

“The BSP’s shift from it’s a gradualist tone to a more flexible guidance on the size and timing of future policy decisions appears to have led to a better alignment of the peso’s decline versus the US dollar versus its Asian peers,” Neri said.

According to Neri, BSP’s rate hikes through 2023 are not expected to have a meaningful negative impact on economic growth.

The Ayala-led bank sees another robust gross domestic product (GDP) growth print in the second quarter of the year after a stronger-than-expected expansion of 8.3 percent in the first quarter of the year.

“We expect another robust GDP growth print in  the second quarter 2022 as campaign spending was in full swing for at least five weeks during the quarter just as year-on-year mobility in retail and tourist spots continued to ramp up annually for the months of May and June despite soaring global commodity prices and the weaker peso,” Neri said.