Point for point, BSP delivers jumbo rate hike to match US Fed

MANILA, Philippines (Updated 4:53 p.m.) — The Bangko Sentral ng Pilipinas unleashed another salvo of rate hikes to control red-hot inflation within the domestic economy, matching the US Federal Reserve’s aggressive tightening action.

Following its rate-setting meeting, the Monetary Board hiked interest rates by 75 basis points on Thursday. Banks and financial institutions use this benchmark rate for setting interest rates on loans.

The benchmark rate currently stands at 5%.

Thursday’s announcement came as no surprise as BSP Governor Felipe Medalla said weeks back that the interest rate hike would match the US Fed’s aggressive rate hikes.

Inflation in the country remains too bitter a pill to swallow as consumers had to adjust to speedy price increases in past months. Government data showed inflation accelerated to 7.7%, its quickest pace in almost 14 years.

At the same time, the series of outsized rate hikes in the US is sinking the Philippine peso to record-lows after record-lows, forcing the BSP to become one of the most hawkish central banks in the region. It was only in recent weeks that the peso was able to hold its ground, after the central bank vowed to defend the local unit against speculation.

Central banks, like the BSP, inject rate hikes to temper inflation within an economy. Ideally, rate hikes effectively control consumption, since higher interest rates would force consumers and businesses to think twice about borrowing money.

Inflation proved to be the largest concern for the BSP, as it emphasized in its briefing.

Inflation pressures

The BSP noted after its rate-setting meeting that inflation compelled the central bank to keep pace with the US Fed’s actions.

“Given the increased likelihood of further second-round effects, persistent inflationary pressures, and the predominance of upside risks to the inflation outlook, the Monetary Board recognized the need for aggressive monetary policy action to safeguard price stability,” it said in a statement.

The BSP likewise revised upward their inflation forecast. For this year, the central bank is now expecting inflation to average 5.8% then slow to 4.3% by 2023. These projections still exceeded the BSP’s target of 2-4%.

By 2024, the BSP expects inflation to grow slightly by 3.1%.

The BSP projected inflation would fall within their 2-4% target by the third quarter of 2023. This is hinged on expectations that oil and commodity prices would decelerate and the economy would feel the impact of the rate hikes.

Likewise, the BSP based its decision to aggressively hike rates since core inflation surged in October. Core inflation is often used as an indicator of the long term inflation trend as well as future inflation. The long-term inflation trend is primarily affected by demand conditions which, in turn, can be influenced by the BSP’s monetary policy.

That said, BSP Governor Medalla even downplayed the peso’s movement in past weeks as it gained ground against the almighty dollar.

“You noticed peso appreciated, not due to solely to what we did, but due to dollar’s weakening but we think it helped. There are time is it’s good to give forward guidance,” he said.

“In normal times, no need for that, we’re not as concerned about peso dollar rate as long as inflation is within target,” Medalla added.

Even then, the central bank was wary that off-cycle rate decisions and 75-bps hikes were still “unusual.” Medalla said in the briefing that the July emergency meet and the decision today were responses to what the US Fed did.

“Perhaps our policy rate increases would be smaller if the Fed’s actions were smaller,” Medalla said.

The BSP embarked on its monetary policy normalization back in May, due in part to combat inflation and arrest the peso’s decline.

Rate hikes seep into the domestic economy six months or so after the central bank sets it, as was the case when credit growth broke an eight-month losing streak in August 2021.

Sought for comment, Nicholas Antonio Mapa, senior economist at ING Bank in Manila, credited the move since there was no push to hike more aggressively.

“BSP was also able to push back on calls for an emergency rate hike with the pre-announcement enough to allay market concerns,” Mapa said.

Domini Velasquez, chief economist at China Banking Corp., said she expects the BSP to keep its aggressive posturing.

“The BSP will remain aggressive as it tries to anchor rising inflation. Hence, it is inevitable that the BSP will keep its 100-bp interest rate differential with the Fed,” she said in a Viber message.

Velasquez explained that elevated inflation forecast next year will still breach the BSP’s 2-4% target, sufficient cause for the BSP to keep interest rates high. 

“A possible cut might only come in the fourth quarter as inflation falls within target in the latter half of the year,” Velasquez added.