Bare Truth by Rose de la Cruz
Bare Truth

BSP vows no more surprises on interest rate hikes

Jul 30, 2022, 1:16 AM
Rose De La Cruz

Rose De La Cruz

Columnist

On July 26, Bangko Sentral ng Pilipinas Governor Felipe Medalla said there will be no more surprise rate increasing coming this year since there is less pressure now on the central bank to fire off jumbo rate hikes to rein in uncomfortably high inflation. The BSP just last July 14 raised policy rates by 75 basis points (BPs) bringing interest rates to 3.25 percent after maintaining it at 2 percent for the longest time due to the pandemic.

Medalla said: “One thing I can say is you can only surprise people once.” Medalla said at an economic briefing on July 26.

Yet, two days later or last Thursday—in a statement reacting to US Fed Monetary policy hikes of 75 bps to help tame inflation bringing uncertainty to global financial conditions which could drive exchange rate movements in emerging markets like the Philippines —Medalla said the BSP is prepared to utilize the full force of available measures in order to address the potential risks to Philippine inflation and inflation expectations arising from an overshooting or excessive depreciation of the Philippine peso.

At the same time, the BSP will continue to be guided by its assessment of the domestic and global developments that affect the outlook for inflation and growth.

Looking ahead, the BSP stands ready to take all necessary monetary policy action to bring inflation back toward a target-consistent path over the medium term. Further monetary policy adjustment will be carried out in the coming months commensurate with the primary objective of preventing inflation from becoming further entrenched.

In short, if conditions worsen, his promise to not increase policy rates for the rest of this year could be broken.

When BSP was allowed by its policy-making body, the Monetary Board to hike rates this month, it did so in an emergency meeting and this took everyone by surprise as it had just raised rates twice by 25 bps in May and June.

After raising the policy rates on July 14 by 75 bps, the following day Medalla was quoted by reporters saying “there’s still a possibility that the BSP would hike rates in August even after the surprise 75-basis point increase.

Sustaining a hawkish tone to calm Filipinos and the market as inflation fears grip, Medalla told Bloomberg that monetary authorities “will not rule out another hike in August,” reported Business World.

But he said “the need to do 50 (basis-point hike) in August is much, much less now.”

“I think we still have some room to raise depending on the inflation picture,” Medalla added. “The key to us is to increase the chances that we will have below 4% inflation next year.”

Ahead of its August 18 meeting, the BSP on Thursday hiked its policy rate to 3.25% to “anchor inflation expectations further and temper mounting risks to the inflation outlook.” Government data showed inflation rose to 6.1% in June, the highest in more than three years and soaring past the government’s 2-4 percent target.

In particular, the BSP said the surprise policy action was “intended to help manage spillovers from other countries that could potentially disanchor inflation expectations."

“The spillover effects from other countries were just too large,” Medalla said. “If you’re sure you’re gonna move a lot in August, might as well do it now.”

On Friday, an official of the US Federal Reserve Board expressed support for a full percentage point hike amid scorching inflation stateside, a move the would likely add more strength to the US dollar and weigh on emerging market currencies like the Philippine peso.

“So there will be no more off-cycle (hikes),” he added.

The powerful Monetary Board, the BSP’s policy making body, will meet again on August 18. At the economic briefing on Tuesday, Medalla struck a dovish tone, saying that while another rate hike could come next month as rates rise fast in the US, there is less pressure now on the BSP to be aggressive in its tightening because global oil prices are starting to drop.

“On one hand, the current drop in price of oil signals there’s a less need for rate hike. On the other hand, the US Federal Reserve is surely going to raise its policy rate by 75 basis points,” Medalla said. (It did so that means, another rate hike is in the offing for us).

But for Nicholas Mapa, senior economist at ING Bank in Manila, Medalla must stay tight in his communication to signal the BSP's willingness to adjust monetary policy to safeguard the inflation trajectory, said Business World.

“This should include remaining data driven, taking his cues from the Fed decision later this week and July’s inflation figure out early next month,” Mapa said.

Michael Enriquez, chief investment officer at Sun Life Investment Management and Trust Corp., believes Medalla is managing to sustain his hawkish messaging.

“I think he is still hawkish on his tone, but he is just telegraphing to expect another 50bps hike next month. This is well above the original expectations of just 25bps per meeting,” Enriquez said in an interview.

Medalla, who previously argued that there was no need to match the Fed’s aggressive actions, said the BSP expects the US central bank to hike by “at least 75 bps” later this month.

“We are acting on the basis of what is already happening and what we expect to happen,” the BSP boss said. “We care about exchange rate only when it’s overshooting -- when it’s adding to problems.”

‘Overkill’

But UK-based think tank Pantheon Economics believes BSP’s tightening cycle may be over now, even arguing that the off-cycle rate hike recently was an "overkill."

Before the unexpected rate increase, Pantheon had projected two more 25-bp hikes in 2023, which could have left the benchmark rate used by banks at 3 percent.

"The out-of-cycle 75bp salvo simply is overkill," Miguel Chanco, Pantheon's chief Emerging Asia economist, said in an emailed commentary.

"The only difference now is that we think that the Bank’s hiking cycle is over, with 2023 unlikely to see any additional increases,” he added. "Remember that the recovery remains very uneven, with capital expenditures still well below the pre-Covid level and likely to be hit hardest by rising rates.”

My take

Our economic managers are fond of making projections—even assurances of seeing no need to further hike policy rates—only to take their word back because of the backlash from a Fed rate hike or whatever other reasons they see along the way.

They should be more prudent in their statements, if they are as prudent in handling our moneys and our economy, so that they can maintain the trust and confidence of the Filipinos in them. Never mind if the global community would not agree with their decisions, but they have to make prudent choices and decisions for the Filipinos and not suit the inkling or wants of foreign investors and the global financial markets.


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