MANILA, Philippines — As the U.S. central bank triggers another oversized rate hike By Lawrence Agcaoili The central bank of the Philippines stands ready to use the full force of available measures to manage the fallout from external developments, including the Reserve’s decision US federal government to raise interest rates by an additional 75 basis points.
Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla said the US Fed’s action, along with tighter global financial conditions and increased uncertainty about global growth prospects, may continue. stimulate exchange rate movements in emerging market economies, including the Philippines. .
“In order to manage the ripple effects of these external developments, the PASB stands ready to use the full force of available measures to address potential risks to Philippine inflation and inflation expectations resulting from an overshoot or excessive depreciation of the Philippine peso,” Medaille said.
Inflation averaged 4.4% in the first half of the year and exceeded the BSP’s target range of 2-4% after accelerating to 6.1% in June from 5.4% in May due to soaring oil prices and high food prices caused by the Russian-Ukrainian war.
On the other hand, the peso depreciated nearly 10% to hit an all-time low of 56.45 to $1 earlier this month due to the hawkish US Federal Reserve and strong demand for US dollars on imports up as economy continues to reopen.
This prompted the BSP’s Monetary Board to deliver a whopping 75 basis point rate hike in a surprise off-cycle rate-setting meeting on July 14 to anchor inflation expectations, temper rising risks weighing on the outlook for inflation and help manage spillovers from other countries. which could potentially unanchor inflation expectations.
Along with back-to-back rate hikes of 25 basis points on May 19 and June 23, the central bank raised the benchmark interest rate by 125 basis points to 3.25%, from a low of 2%.
The BSP chief previously ruled out another huge 75 basis point rate hike and a surprise off-cycle rate-setting meeting.
“Our next meeting is in August, so you have to bet on four numbers: zero, 25 (basis points), 50 and 75. Just like in diving, you can rule out the low and the high,” Medalla said during of the Post-SONA 2022 Economic Briefing.
According to Medalla, monetary authorities will continue to be guided by their assessment of 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 actions to bring inflation back to a path consistent with the medium-term objective.
“Further monetary policy adjustment will be made in the coming months based on the primary objective of preventing inflation from taking root further. The BSP believes that the strong economic outlook for the Philippines continues to offer sufficient room for further tightening of monetary policy stance,” Medalla said.
For his part, Bank of the Philippines Chief Economist Jun Neri said the BSP’s decision to carry out an outsized and unanticipated policy hike on July 14 seems to have calmed market participants, as it signals an increased willingness of monetary authorities to limit inflationary expectations and the spread of second-round effects emanating from supply-side shocks.
On the one hand, the local currency appreciated back to the 55-$1 level after hitting the all-time low of 56.45-$1 a few weeks ago.
“The BSP’s shift from a gradual tone to a more flexible focus on the size and timing of future policy decisions appears to have led to a better alignment of the peso’s decline against the US dollar relative to its Asian peers,” Neri said.
According to Neri, BSP rate hikes through 2023 should not have a significant negative impact on economic growth.
The Ayala-led bank sees another impression of robust gross domestic product (GDP) growth in the second quarter of the year after a stronger-than-expected 8.3% expansion in the first quarter of the year.
“We expect further robust GDP growth in the second quarter of 2022 as campaign spending was in full swing for at least five weeks in the quarter, as was year-over-year mobility in places. retail and tourism sales continued to accelerate each year during May and June despite soaring global commodity prices and a weak peso,” Neri said.