BSP may respond point by point to Fed’s next hike

THE BANGKO SENTRAL ng Pilipinas (BSP) may have to respond to the US Federal Reserve point by point as the rate differential has become too narrow.

“If I’m the only one voting, I will match the next Fed increase. The interest rate differential has become too narrow,” BSP Governor Felipe M. Medalla said at a forum hosted by the Bankers Association of the Philippines.

“Given our inflation level, given what is happening to the exchange rate, we, in this case, must respond to the Fed point by point,” he added.

The BSP governor said the Monetary Board is likely to deliver another 75-basis-point (bp) hike at its next rate-setting meeting on Nov. 17.

This as the US Federal Reserve is expected to deliver its fourth 75-bp rate hike at its next policy meeting on Nov. 1-2.

“If they do 75 (bps), we do 75. If they do 50, we do 50. If they do 100, we do 100,” Mr. Medalla added.

The BSP has so far raised the key policy rate by 225 bps to 4.25% this year to tame inflation and slowdown the peso’s decline.

“I personally believe we must be a little bit more aggressive in increasing rates also because I think the economy can withstand it,” the BSP chief said. 

The economy expanded by 7.8% in the first half of the year, still above the government’s 6.5-7.5% full-year target. Third-quarter gross domestic product (GDP) data is scheduled to be released on Nov. 10.

The Philippine peso hitting P61 against the US dollar is “not the end of the world,” Mr. Medalla was quoted as saying by Reuters.

Mr. Medalla also told reporters on the sidelines that as long as there is volatility in the foreign exchange market, the BSP will intervene.

The peso ended trading at P58.78 per dollar on Tuesday, appreciating by nine centavos from its P58.87 close on Monday, based on data from the Bankers Association of the Philippines. Year to date, the peso has weakened by P7.78 or 13.2% from its Dec. 31, 2021 close of P51.

“Our reserves are more than adequate despite recent intervention,” Mr. Medalla said.

The gross international reserves (GIR) stood at $95.01 billion as of end-September, falling by 2.4% from the $97.44 billion as of end-August, data from the central bank showed.

Finance Secretary Benjamin E. Diokno earlier said the government will not allow the peso to breach the P60-per-dollar level.

Meanwhile, the BSP expressed its support to the National Government’s (NG) initiatives in boosting the supply of essential food commodities and in addressing supply-side pressures that are driving inflation.

“The overall supply of agricultural commodities continues to be restricted by low farm productivity and high production costs, worsened by global supply disruptions, persistent animal diseases, uncertainties due to the Ukraine-Russia conflict, and tariff and non-tariff restrictions on agricultural trade,” the BSP said in a statement on Tuesday. 

“Addressing high inflation requires a whole-of-government approach to protect vulnerable sectors of the economy from the impact of high prices. Targeted measures by the NG to improve farm productivity and address bottlenecks for key food items are crucial in mitigating supply-side pressures on inflation.”

Headline inflation accelerated to 6.9% in September, from 6.3% in August and 4.2% in September 2021, marking the sixth straight month that inflation breached the central bank’s 2-4% target.

“The central bank’s monetary policy actions are also working in tandem with fiscal policy and programs to prevent inflation expectations from becoming more entrenched,” the BSP said.

“The BSP remains vigilant in monitoring all risks to the inflation outlook and is prepared to take all necessary monetary policy action to bring inflation toward a target-consistent path over the medium term, and in turn, steer the economy toward a sustainable growth path,” it added. — Keisha B. Ta-asan with Reuters