BSP to continue policy tightening

THE BANGKO SENTRAL ng Pilipinas (BSP) is ready to use the “full force” of monetary policy measures to curb inflation and support the Philippine peso, after the United States Federal Reserve delivered another super-sized rate hike.

“The action of the US Federal Reserve, 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,” BSP Governor Felipe M. Medalla said in a statement.

“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.”

The US Federal Reserve on Wednesday delivered a 75-basis-point (bp) rate hike for the second straight meeting, as it continued its fight against inflation.

In a bid to keep up with the Fed, the BSP raised its benchmark rates by 75 bps in an off-cycle move on July 14. The Monetary Board has raised policy rates by a total of 125 bps this year.

The Monetary Board is scheduled to hold its next policy meeting on Aug. 18. Mr. Medalla on Tuesday signaled they might consider a rate hike of 25-50 bps next month.

The Philippine peso closed at P55.82 a dollar on Thursday, shedding 14 centavos from its P55.68 finish on Wednesday, based on Bankers Association of the Philippines data. The peso breached the P56 level against the US dollar earlier this month.   

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

“Further monetary policy adjustment will be carried out in the coming months commensurate with the primary objective of preventing inflation from becoming further entrenched,” he added.

Inflation rose to 6.1% year on year in June — the fastest in nearly four years — and exceeded the central bank’s 2-4% target for a third straight month. This brought the average inflation this year to 4.4%, still below the BSP’s full-year forecast of 5%.

“BSP’s statement signals to the market that they are committed to fighting inflation and the statement will work to contain previously spiraling inflation expectations,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.

Asked what BSP meant about the “full force of available measures,” Mr. Mapa said: “Mainly I think they are referring to their main policy rate as well as the interest rate corridor. Reserve requirements (RR) can also be utilized although guidance has been that RR would be lowered if ever it is used.”

The BSP earlier committed to bring down the reserve requirement ratio (RRR) of big banks to single digits by 2023. However, it lowered the ratio for banks in March 2020 to cushion the impact of the pandemic on the economy. The ratio for big banks is 12%, one of the highest in the region. Reserve requirements for thrift and rural lenders are 3% and 2%, respectively

Meanwhile, Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said the BSP has room to raise its policy rates by 100 bps this year without hurting gross domestic product (GDP) growth.

“We believe the BSP will need to raise the reverse repurchase rate toward 4.25% at the end of this year and towards 4.75% through mid-2023 in order to ensure that price stability remains conducive to growth,” he said. 

“The rate hikes will probably not hurt the domestic economy that much because we are just going back to pre-pandemic levels. For 10 straight years, 2010 to 2019, we grew by an average of 6.4% with a policy rate that was close to 4%,” he added.   

The BSP slashed benchmark rates by 200 bps to support the pandemic-hit economy in 2020, bringing the policy rate to a record low of 2%.   

The Development Budget Coordination Committee is targeting 6.5-7.5% GDP growth this year. 

The Philippine Statistics Authority is scheduled to release July inflation data on Aug. 5, and second-quarter GDP data on Aug. 9. 

“The BSP believes the Philippines’ robust economic prospects continue to provide enough room for further tightening of the monetary policy stance. As always, the BSP’s future monetary policy decisions will remain guided by data outcomes for the Philippine economy,” Mr. Medalla said. – K.B.Ta-asan