NextGen Day

Despite the 50 basis point increase on Thursday, an economist has predicted future increases in the Bangko Sentral ng Pilipinas (BSP) main policy rates due to the need to address interest rate differentials with the Federal Reserve.

In a report published on August 18 by Rizal Commercial Banking Corp. (RCBC), chief economist Michael Ricafort claimed that the most recent rise in the BSP’s key rates was a preventative measure because the Federal Open Market Committee is anticipated to raise the Fed’s key rates by 50 basis points to 75 basis points on September 21.

Given the effect on the world currency market, he added, “Any more local policy rate hike/s in the coming months would still be essentially a consequence of any subsequent Fed rate hikes, more than anything else.”

Further increases in the Federal Reserve’s rates, which would be between 2.25 percent and 2.50 percent, according to Ricafort, “would make the interest rate differential in favor of the US dollar and would still make the current 3.75 percent local policy rates unusually close to the Federal Reserve Funds Rates by that time.”

He said that the BSP rates’ off-cycle 75 basis point rise in July was implemented in part to help stabilize the local currency, which had fallen to the level of 56 against the US dollar at the time.

According to Ricafort, part of the central bank’s duty for price stability includes addressing the excessive volatility of the exchange rate.

Additionally, he continued, “this would help better manage/anchor both actual inflation and inflation expectations.”

The rate of price rises is still increasing, and in July 2022 it reached 6.4 percent, which is the highest level since October 2018.

According to Ricafort, the weaker peso exchange rate causes inflation and raises the price of imported goods like petroleum.

Further increases in the BSP’s key rates, according to him, are expected to address second-round effects, or the consequences of elevated inflation, such as an increase in the minimum wage and minimum transportation fares, as well as reduce the negative interest rate returns. This is in addition to addressing the high inflation rate and the interest rate differential with the US.

Although supply restrictions that cause inflation to rise are thought to be addressed by non-monetary measures, he continued, they “may be supported by outright policy rate hike/s.”

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