BSP chief says tightening not yet done, but sees softer Fed rate hikes

This October 27, 2022 photo shows Bangko Sentral ng Pilipinas Governor Felipe Medalla at “The Asset 17th Philippine Summit” in Taguig City.
BSP/Released

MANILA, Philippines — The Bangko Sentral ng Pilipinas is expected to continue hiking interest rates, but the size of the increases will depend on accelerating inflation and the US Federal Reserve’s next action.

BSP Governor Felipe Medalla told reporters in an ambush interview on Tuesday that any future decisions will be anchored on developments.

“It depends on what the US does, it depends what the inflation numbers are,” he said.

Medalla’s outlook pegged that the US Federal Reserve will keep raising interest rates, but will not be as big as 75 basis points.

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“[This is] a lot less painful for economic growth in the Philippines. If they’re doing 50 basis points, given that the policy rate differential is already small, we cannot afford zero,” he said.

“The outlook is that maybe the US will do 50 then 25. Of course, I could be wrong but that’s the outlook,” Medalla added.

The series of outsized rate hikes in the US is sinking the Philippine peso to record-lows after record-lows, forcing the BSP to become one of the most hawkish central banks in the region. It was only in recent weeks that the peso was able to hold its ground, after the central bank vowed to defend the local unit against speculation.

Central banks, like the BSP, inject rate hikes to temper inflation within an economy. Ideally, rate hikes effectively control consumption, since higher interest rates would force consumers and businesses to think twice about borrowing money.

No need for off-cycle hike

Even then, Medalla squashed worries that an emergency rate hike is still within the policy horizon.

“No need. We did two things rather unconventional. In the July off-cycle, we announced the policy rate two weeks before the meeting. We’ve done unusual things under unusual circumstances,” he said. “Of course unusual things don’t work if they’re not unusual.”

The Monetary Board hiked interest rates by 75 basis points this month. Banks and financial institutions use this benchmark rate for setting interest rates on loans.

The benchmark rate currently stands at 5%.

Medalla likewise said the possibility of the BSP pausing its interest rate hikes remains off the table, adding that “it’s too early to tell.”

Inflation has wreaked havoc on the Filipino consumers’ purchasing power as expensive prices of good forced many to rethink their spending. Despite this, the Philippine economy managed to post 7.6% growth figures in the third quarter, anchored by resilient consumer spending.

 “We don’t want shocks to last beyond its natural existence,” Medalla said.

“What happens if people expect inflation to be higher? Then people will ask for higher prices that shocks will gets propagated,” he added.

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