The Bangko Sentral ng Pilipinas is expected to raise rates if the US Federal Reserve tightens its policy to support the peso and prevent it from fueling inflation.
The Bangko Sentral ng Pilipinas (BSP) will have to raise rates if the United States (US) Federal Reserve tightens policy further to support the peso and keep the currency's weakness from fueling inflation.
BSP has raised interest rates by 300 basis points (bp) this year to repress inflation, running near 14-year highs, and support the peso, which has fallen sharply against the dollar as a result of aggressive monetary tightening in the US, Business World reported yesterday.
The Federal Reserve is expected to raise interest rates by a smaller amount in December, but Reuters, in a poll of economists, sees a longer period of tightening and a higher policy rate peak as risks to the current outlook.
“If the Fed does 50, we cannot have zero right? So the question is whether it’s 25 or 50.” BSP Governor Felipe M. Medalla told Reuters.
“If you have a scenario (where) the Fed will not hike any more then I can tell you flat out, neither are we.” He added.
On Thursday, BSP already raised interest rates by 75 bp in response to the Fed’s three-quarter point hike earlier this month. It is expected to hike again in December.
BSP’s rate hike brought the rate on its overnight reverse repurchase facility to 5.0 percent, the highest in nearly 14 years. That compares with the Fed’s policy rate of 3.75 percent to 4 percent.
Based on a Reuters poll, the Fed would most likely raise rates by 50 bp next month after four consecutive 75-bp increases.
The Fed will meet again on December 13 and 14, while the Monetary Board will meet for the final time this year on December 15.
Medalla reiterated that rate differentials between the US and the Philippines should not be allowed to narrow sharply, lest the peso's weakness persists and drive up the already high import prices for food and fuel.
A narrowing rate differential has caused the peso to fall 11 percent against the dollar this year, putting the currency at the forefront of the BSP's policy decisions.
“If inflation is a huge problem, you don’t want the weakening of the peso to add to that further.” Medalla said.
Inflation is currently at 7.7 percent; the BSP hopes to return inflation to its target range of 2 to 4 percent by the second half of next year.
The economy is expected to withstand the series of rate hikes thanks to pent-up demand as it grew by an unexpected 7.6 percent in the third quarter this year.
“The postponed spending on the capex side plus the pent up demand on (the) consumer side means we will have fairly strong demand despite the rate increases.” Medalla concluded.
Tags: #BSP, #Feds, #Peso, #Inflation