Bare Truth by Rose de la Cruz
Bare Truth

Raising interest rates in June

Apr 30, 2022, 2:16 AM
Rose De La Cruz

Rose De La Cruz


Bangko Sentral ng Pilipinas Governor Benjamin Diokno, in an economic briefing at PICC last April 27, said they may consider a rate hike in June as economic recovery likely gained more traction in the first quarter.

They held on to the 2 percent lending interest rates—despite the global central banks’ raising theirs for a long time even before the US Federal Reserve raised it rates thereby causing inflation jitters and actual hikes.

Still as for our center bank, it decided to stay such rates to make it look like the Philippines is in far better shape than the rest of the world, who are forced to take this bitter pill.

In reality, even without those rate hikes, inflation (especially food inflation) in our country has been going up although BSP economists claim it is within their targets. Just going to the market would defy such logic because each and every event in the market place shows prices going nowhere but up.

Why June? Because that is when the new administration—a toss up between the two leading candidates (Marcos Jr. in surveys but VP Leni Robredo in warm bodies at rallies and a passionate volunteerism never seen in our history)—to suffer the consequence and answer to the people why things are going haywire.

The outgoing administration it seems to me wants to leave nothing but a superficially good image so that when the incoming leader takes over people will put all the blame of their economic woes on it.

Diokno said the May 19 (Monetary Board) policy meeting will already take into consideration the first-quarter gross domestic product (GDP) data that will be released on May 12.

“We will look at the new data and hopefully it will show the first-quarter growth, maybe around 6-7 percent,” Diokno told Bloomberg TV on Monday. But what if GDP does not go the way it wants?
“And so, on the basis of that, maybe we’ll wait another cycle… We have another meeting in June. And maybe that’s the time when we will consider the increase in policy rates,” he added.

The BSP has maintained interest rates at a record low since November 2020 to support the Philippine economy’s recovery from the pandemic.

Hurrying it up for June

Diokno’s latest statement is a departure from the BSP’s previous signals it will only begin policy rate adjustments in the second half once it sees signs of firmer economic recovery. (Notice some semblance of haste)? Government officials expect GDP to get back to its pre-pandemic level within the second half of the year.

The BSP chief said there is still “no evidence of second-round effects [of inflation] from the demand side.”

“I think we can afford to wait as to what will be the move of the Fed in the next two meetings,” Business World reported Diokno as saying.

The Fed’s next policy review is on May 3 to 4. Fed Chairman Jerome H. Powell said they may increase rates by 50 basis points (50 bps) following the 25-bp hike in March.

Headline inflation in the Philippines accelerated to a six-month high of 4 percent in March, already matching the upper end of the 2-4 percent target band.

The recent spike in oil and commodity prices has prompted groups to file petitions to raise transport fares and wages.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said Diokno’s latest signal is a step in the right direction to show the BSP’s commitment to its price stability mandate. What price stability—consumers have been finding it difficult to stretch every centavo.

The release of first-quarter economic data will likely strengthen the case for the BSP to raise rates on May 19 or June 23.

“First-quarter GDP will likely be robust, driven by resurgent household spending and to a lesser extent capital formation and government spending. Meanwhile, inflation will likely breach the target as early as April and continue to accelerate all throughout the quarter,” Mapa said.

Despite an Omicron-driven surge in coronavirus infections at the start of the year, economic activity appears to have picked up in February and March as restrictions were loosened. Metro Manila was downgraded to the most lenient alert level starting March.

Mapa said he expects the BSP to cumulatively increase rates by 100 bps until the end of 2022, with the first one being a 25-bp hike.

“A policy adjustment may do little to slow cost-push inflation, but a higher policy rate would help stabilize the floundering peso, which in turn would limit imported inflation,” Mapa said. This to me sounds like BSP has been dilly-dallying on its rates hike decision for nothing, but just for show.+
“Meanwhile, although policy tightening would indeed sap some recovery momentum by capping further investment outlays, we believe that the recovery is on solid footing and robust enough to withstand such an adjustment,” he added.

Meanwhile, UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said he is pricing in a 25- to 50-bp rate hike in June.

“With the more hawkish US Fed and the backdrop of more hikes in the next coming months to contain its own inflation upticks, you do not want to be a step too late and find yourself scrambling to keep up with the external environment,” Asuncion said. These bank economists should know when a perfect time is.

Depreciating peso

He noted how the dollar has recently been strengthening versus the peso amid Fed signals of more rate hikes.

At its close of P52.41 per dollar on Monday, the peso has weakened by 2.8% from its end-2021 finish of P50.999.

“We’re not concerned about the depreciation,” Diokno said, adding this is in line with the decline in other regional currencies.

Meanwhile, Diokno said a reduction in the banks’ reserve requirement ratio (RRR) is still on the table.

Such a move is “not related to the crisis at all,” he stressed adding that he wanted to bring down the RRR to a single digit by the end of his term in 2023 even prior to the pandemic.

“That’s still on the table. We will allow them [banks] to lend out the money rather than the central bank getting the money from them,” he said.

The reserve requirement for big banks is currently at 12 percent.

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