NextGen Day

According to an economist, any rate modification decision by the Bangko Sentral ng Pilipinas (BSP) will be based on both the performance of the peso and the rising inflation rate.

The Monetary Board (MB), which sets policy for BSP, raised the key interest rates by the largest amount yet on July 14th, off-cycle, citing the necessity to counteract the impact of global monetary policy tightening and the resulting price pressures.

The choice was made the day after the US reported that its consumer price index (CPI) increased further in June to 9.1%, the quickest rate since November 1981. This news led economists to predict that the Federal Funds Rate would continue to rise aggressively.

Responding to queries from the Philippine News Agency, chief economist of Rizal Commercial Banking Corporation (RCBC) Michael Ricafort stated that despite a recent sharp increase in the BSP rate, the local currency is still trading at a level of 56 against the US dollar.

He does, however, predict that the peso would stabilize in the final quarter of the year as a result of seasonal inflows, which soar over the holidays due in part to stronger export sales and remittances from Filipino employees working abroad (OFWs).

Since the beginning of the year, the local currency has declined by about 10.5 percent against the US dollar, according to Ricafort. This has made Philippine investments, particularly those available at relatively low prices like local stocks and other investments/assets, more appealing to foreign investors who choose to convert US dollars to pesos and buy them.

He claimed that the purpose of the most recent BSP rate rise was to support the peso in light of the Federal Reserve’s anticipated announcement of further significant rate increases, which would widen the gap between US and Philippine interest rates.

In addition, he added, “This (rate increase) would better manage/anchor both real inflation and inflation expectations.”

A total of 150 basis points have been added to the BSP’s policy rates this year: 25 basis points in March, 50 in June, and 75 most recently.

The BSP’s overnight reverse repurchase (RRP) rate has increased from the all-time low of 2 percent since 2020, when the MB cut the central bank’s policy rates by a total of 200 basis points to lessen the impact of the pandemic on the economy, to its current level of 3.25 percent.

The BSP’s key rates, which are currently between 1.5 and 1.75 percent, have never been lower than the Fed’s, according to Ricafort, in part because of the disparity between the countries’ credit ratings and the long-term inflation outlook.

During this week’s FOMC meeting or on July 26 and 27, he predicted that the Fed funds rate would rise to a range of 2.50 and 2.75 percent.

He noted that “any further local policy rate hikes would also be partly a function of how the peso exchange rate behaves and the impact on inflation as well as actual inflation data, going forward.” “More local policy rate hikes are still possible, if needed, as a function of any further Fed rate hikes to bring down elevated US inflation/CPI,” he said.

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