Another huge increase in interest rates looms  

MANILA, Philippines —  The Bangko Sentral ng Pilipinas (BSP) is expected to deliver another huge rate hike of between 50 and 75 basis points next month amid further pressure on the Federal Reserve to continue its aggressive monetary tightening policy, including raising interest rates as US inflation soared to a 40-year high of 8.2 percent in September. In an interview with Bloomberg Television in Washington, BSP Governor Felipe Medalla has  discounted the possibility of  raising the interest rates by just 25 basis points during the next rate-setting meeting of the Monetary Board on Nov. 17.

“We cannot do 25 basis points. It’s really a question of whether 50 or 75 basis points,” Medalla said.

Medalla, who is currently in Washington attending the 2022 Annual Meetings of the International Monetary Fund and the World Bank Group, said that by delivering a 75-basis-point rate hike,  it would reduce the pressure on the peso and help tame soaring inflation.

However, the BSP chief said that an aggressive rate hike could affect the economy that is still recovering from the impact of the COVID-19 pandemic.

“The disadvantage, of course (of an aggressive rate hike),  is that the economy is still recovering from COVID and we want that recovery to continue, to remain robust,” Medalla said.

According to Medalla, the US Fed is seen delivering two more rate increases of 75 basis points and another 50 basis points  for the rest of the year, saying that “what the Fed does has a very significant impact on what we will do.”

“For the Philippines, it’s all a question of how much we will respond. The argument for not responding point-by-point is that our inflation rate is lower, but the argument for doing something bolder is that the question of the currency also has to be addressed,” the BSP chief said.

After emerging from the pandemic-induced recession with a gross domestic product (GDP) growth of 5.7 percent last year, the economy expanded by 7.8 percent in the first half  and exceeded the 6.5 to 7.5 percent target penned by economic managers.

The Philippines slipped into recession in 2020, with the GDP shrinking by 9.6 percent as the economy stalled due to strict COVID quarantine and lockdown protocols.

As part of its COVID response measures, the BSP slashed interest rates by 200 basis points in 2020, bringing the benchmark interest rate to an all-time low of two percent.

The central bank maintained an accommodative stance in 2021 to allow the economy to recover from the impact of the global health crisis.

Confident that the economy is able to absorb the tightening cycle, the Monetary Board has so far raised interest rates by 225 basis points, bringing the benchmark rate to 4.25 percent, the highest since the 4.50 percent in June 2019.

The rate cuts, including the huge 75 basis points delivered during a surprise off-cycle rate setting meeting last July 14, were aimed at taming inflation and stabilizing the peso.

The BSP now expects inflation to average at  5.6 percent this year after averaging 5.1 percent in the first nine months as it accelerated to 6.9 percent in September from 6.3 percent in August.

It sees inflation still exceeding the central bank’s two to four percent target, averaging 4.1   percent next year.

To alleviate inflation, Medalla said the government could reduce import restrictions on key agricultural products to augment other actions such as raising interest rates.

On the other hand, the peso hit an all-time low of 59 to $1 on Oct. 3, 10, and 13 as major currencies continues to weaken against the   dollar due to the aggressive rate hikes delivered by the US Fed as it continues to fight inflation.

The local currency depreciated by 15.7 percent to hit new record lows this year from the end-2021 level of 50.999 to $1, making the peso one of the worst performing currencies in the region this year.

The central bank chief earlier said the BSP is active in the foreign exchange market to smoothen the volatility of the peso, and clarified that there would be no more off-cycle rate-setting meeting for the rest of the year.

A weak peso could further stoke inflation, as the strong greenback makes imports more expensive.