BSP move in focus as US Fed hike looms

MANILA, Philippines — A possible interest rate hike in the United States is putting the Bangko Sentral ng Pilipinas (BSP)’s next move in focus, with analysts offering differing views on whether further tightening is needed and how soon it should come.

Reyes Tacandong & Co. senior adviser Jonathan Ravelas said a possible US Federal Reserve rate increase could prompt an off-cycle BSP hike of 25 to 50 basis points, potentially as early as today.

However, Chinabank chief economist Domini Velasquez sees neither a need nor a meaningful chance for such a move.

Security Bank chief economist Angelo Taningco also sees a low probability of an off-cycle hike but expects the BSP to raise rates by 25 basis points at its October meeting.

The Fed has yet to announce its decision as of yesterday, with the outcome expected Thursday morning, Manila time.

“I wouldn’t be surprised if there is an off-cycle hike in reaction to the Fed,” Ravelas said.

An off-cycle hike is an increase in the central bank’s benchmark interest rate outside a scheduled policy meeting. The benchmark influences borrowing costs for households and businesses.

Ravelas said a 50-basis-point rate increase could be appropriate if the Fed raises rates by 25 basis points and further US tightening is expected in the fourth quarter.

Under that scenario, he said, half of the BSP increase would preserve the gap between Philippine and US policy rates, while the other half would help contain inflation expectations amid rising gasoline prices.

“The 25-basis-point (hike) is to maintain the differential. The 25-basis-point (hike) is to lock in inflation expectations,” Ravelas said.

The interest rate differential is the gap between rates in the two countries, which can influence the relative appeal of peso and dollar investments.

Ravelas said higher oil prices and US interest rates would keep pressure on the peso. Still, he framed his preferred BSP response primarily as a way to prevent expectations of future price increases from rising.

He emphasized that a move outside the BSP’s regular schedule remained a possibility rather than a certainty.

Velasquez offered a different assessment, arguing that preserving the rate gap should not be the BSP’s main consideration.

“Instead, the BSP’s decision will likely be driven more by its inflation outlook and the economy’s ability to absorb elevated interest rates,” she said.

Velasquez said weak domestic demand leaves little justification for another increase in borrowing costs.

“Our view remains that domestic demand is still too soft to warrant further tightening,” she said.

Chinabank believes the BSP has likely finished raising rates, with anticipated weakness in third-quarter economic growth expected to weigh on its assessment.

“We think the BSP has likely reached the end of its hiking cycle, with weak economic growth in the third quarter likely to be an important factor in its assessment,” Velasquez said.

Meanwhile, Taningco expects another BSP rate increase in October but sees a low probability of an off-cycle move even if the Fed raises rates by 25 basis points.

“The probability for a BSP off-cycle hike is low because the Fed rate hike is widely expected and priced in by the market already,” Taningco said.

Taningco forecasts a 25-basis-point rate hike in October, bringing the benchmark rate to 5.25 percent, where he expects it to remain through year-end.