BSP stays on guard vs market volatilities

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is closely monitoring the impact of the possible policy action of the US Federal Reserve after its chairman Jerome Powell noted both progress made on easing price pressures as well as risks from the surprising strength of the US economy.

BSP Governor Eli Remolona Jr. said the Monetary Board has space to further extend its hawkish pause even if the Fed delivers another rate hike.

However, Remolona said the next policy action of the BSP would depend on data that comes out.

During the annual Jackson Hole Economic Policy Symposium on Aug. 25, Powell stressed the possibility of raising interest rates further to cool the still-too-high inflation down to the two percent goal amid the stronger US economy.

“We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data,” Powell said in a keynote address.

The BSP chief likened Powell’s policy dilemma to William Shakespeare’s “To be, or not to be” Hamlet soliloquy, wherein the character could not decide which is better – to live or die.

The BSP has maintained a hawkish pause in the last three rate-setting meetings since May this year amid the inflation downtrend, the stable peso and the recent slackening of gross domestic product growth.

The BSP has been the most aggressive central bank in the region after delivering a cumulative 425-basis-point rate hikes between May 2022 and March 2023 to tame inflation and stabilize the peso.

The benchmark interest rate was maintained at 6.25 percent during the last rate-setting meeting on Aug. 17. The next rate-setting meeting of the BSP is on Sept. 21.

Inflation eased to 4.7 percent in July from a peak of 8.7 percent in January, bringing the average to 5.8 percent during the seven-month period this year, still above the BSP’s two to four percent target.

While confident of bringing inflation back to within the target band by the fourth quarter, the BSP raised its inflation forecasts to 5.6 percent in 2023, 3.3 percent for 2024 and 3.4 percent for 2025 due to rising global oil prices, the higher-than-expected wage adjustment and the weakening of the peso against the dollar.

In the US, after raising interest rates 10 consecutive times from 0.25 percent in March 2022 to 5.25 percent on May 3, the Fed announced a pause in  interest rate hikes in June.

However, it delivered another 25-basis-point hike last July 26 that brought the Fed fund rate to 5.50 percent.

Remolona said the US Fed closely watches inflation as well as job growth.

Inflation in the US eased to 3.3 percent from its peak of seven percent last summer, but “remains too high” versus its two percent goal.

Fewer jobs were added to the US economy in July as the decline in the unemployment rate back to 3.5 percent pointed to continued tightness in labor market conditions.

With the recent Fed hike, the interest rate differential between the Fed fund rates and the BSP’s overnight reverse repurchase rate narrowed to 75 basis points.

Remolona said monetary authorities are more worried about the impact of uncertainties to the peso rather than the narrowing interest rate differential.

China Bank chief economist Domini Velasquez said Powell’s comments in the Jackson Hole Symposium showed the Fed was still quite hawkish.

“As a result, we expect the BSP to remain on standby for any possible financial market volatilities. An excessive peso depreciation can still prompt BSP to hike. To aggravate the situation, we are also seeing higher food and oil prices possibly driving inflation higher this second half of the year,” she said.

A key takeaway from Jackson Hole is that the Fed has reiterated that it would keep interest rates elevated for a longer period of time.

“As a consequence, even with inflation falling within the BSP’s target for the Philippines, cutting of policy rates may de delayed to preserve interest rate differentials,” Velasquez added.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said Powell’s statement was not entirely surprising.

“This signal is consistent with earlier hints and hawkish messages so not entirely surprising, also similar to the hawkish pause by the local monetary officials (BSP),” Ricafort said.

He said Powell signaled a pause in the next Fed rate-setting meeting scheduled on Sept, 20, adding that markets are now expecting a possible 25-basis point hike on Nov. 1.