NextGen Day

Future adjustments to the Bangko Sentral ng Philippines (BSP) key rates are anticipated to be influenced by the trajectory of the Federal Reserve’s key rates, domestic inflation, and the performance of the peso.

The Monetary Board (MB), which sets the central bank’s policy, increased the BSP’s key rates on Thursday by 50 basis points, bringing the overnight reverse repurchase (RRP) rate to 6 percent. Among other things, the Monetary Board took note of the higher-than-anticipated January 2023 inflation rate of 8.7 percent.

Michael Ricafort, the chief economist of Rizal Commercial Banking Corporation (RCBC), said the RRP rate, which will go into effect this Friday, is the highest in more than 15 years or since July 2007. He added that the most recent rate adjustment in the central bank’s key rates is the eighth straight increase.

After recent indications from Fed Chair (Jerome) Powell about a potential higher peak in the Fed(eral Reserve) Funds Rate, especially if the US labor/employment market remains strong, he said, “Local policy rates would still be largely a function of the local inflation trend as well as the future Fed rate hikes.”

According to Ricafort, the market anticipates two to three additional rate increases before June of this year, and the BSP’s key rates will likely match any future Fed rate increases.

The following local rate-setting meetings will take place on March 23, 2023, and May 18, 2022, he said. “As a result, any additional Fed rate hikes of approximately +0.25 each, especially on March 22, 2023, and May 2, 2023, could be, at least, matched locally on the next local rate-setting meetings, [which] help stabilize the peso exchange rate and overall inflation.

The timing and magnitude of any upcoming increases in local policy rates, according to Ricafort, “would also depend on the behavior of the peso exchange rate given its impact on import costs and overall inflation.”

So, he continued, “any future changes to local policy rate would just match any future Fed rate increases in the near future assuming the peso exchange rate is largely steady.”

Thursday’s closing peso rate versus the US dollar was PHP55.12, down from PHP55.17 from the previous day.

According to Ricafort, the BSP takes inflation into account heavily when determining the number of potential rate increases.

However, he added, “this is offset by the fact that supply-side inflationary pressures, not brought on by higher demand, would not make further rate hikes effective. Accordingly, non-monetary measures to increase the local supply of food and other commodities in an effort to lower prices and overall inflation could be better addressed.

The BSP increased its estimate of average inflation for 2023 from 4.5 percent to 6.1 percent, significantly higher than the government’s planned range of 2 to 4 percent.

Further rate hikes are anticipated, according to ING senior economist Nicholas Mapa, given the hawkish remarks made by BSP Governor Felipe Medalla and the increase in the central bank’s average inflation prediction.

Mapa predicts a 25 basis point increase in the BSP’s key rates during the rate-setting meeting of the MB in March, citing Medalla’s remarks that inflation pressures remain high and non-monetary policies take some time to affect inflation.

We now anticipate a 25 bp (basis points) rate hike by the BSP at the March meeting with our prediction for the BSP’s terminal rate at 6.25 percent, he continued, “given this fresh information and the obviously changed tone from Governor Medalla.”

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