THE BANGKO Sentral ng Pilipinas (BSP) may increase policy rates by “at least 100 basis points (bps)” this year to curb rising inflation, its governor said on Tuesday.
“We should be moving to a policy rate that is higher than the midpoint of our (inflation) target (of 2-4%), which is 3% at the very least. That means we have to do 100 (bps) more at least,” BSP Governor Felipe M. Medalla said in an interview with Bloomberg TV.
This will likely bring cumulative hikes to 150 bps, bringing the benchmark rate to 3.5% by end-2022. Interest rates on the overnight deposit and lending facilities would also end the year at 3% and 4%, respectively.
Mr. Medalla said an increase of at least 25 bps is guaranteed at the Monetary Board’s next meeting on Aug. 18, but he is also open to a bigger increase of up to 50 bps.
The Monetary Board has raised benchmark interest rates by a total of 50 bps so far this year, via 25-bp hikes at its May 19 and June 23 meetings, bringing the policy rate to 2.5%.
“The need to exit from our very unconventional monetary policy necessitated by the pandemic became more urgent because of what’s happening in the advanced countries and because of the supply shocks,” Mr. Medalla said.
This has made the BSP advance the implementation of its exit plan, which was originally planned to begin in the third or fourth quarter, he said.
Headline inflation climbed by 6.1% in June, from 5.4% in May and 3.7% a year ago, reflecting higher prices of food, transport and utilities. It matched the pace recorded in November 2018 and was the fastest since the 6.9% seen in October 2018.
Inflation inched up by 0.9% month on month. Adjusting for seasonality factors, month-on-month inflation climbed by 1% in June.
“If we get bad month-on-month numbers, we will have to respond because even though the basic cause of inflation is supply, it is likely to have effects on expectations and therefore we will have to act before the supply shocks are converted to higher future inflationary expectations,” Mr. Medalla said.
The Monetary Board has four more meetings scheduled for the year to be held on Aug. 18, Sept. 22, Nov. 17 and Dec. 15.
PESO“The recent large policy rate hikes of the Fed in reaction to, what most would consider to be, unanticipated, meaning wrongly forecasted, US inflation spike is causing nearly all currencies to significantly depreciate against the US dollar. This is certainly adding another layer of complication to our domestic inflation-targeting and expectations,” Mr. Medalla said during the BSP’s 29th anniversary and turnover ceremony on Monday.
The US Federal Reserve’s aggressive monetary policy tightening has put downward pressure on the peso.
The peso closed at P55.23 per dollar on Tuesday, down by 15 centavos from its P55.08 finish on Monday, Bankers Association of the Philippines data showed. For the year so far, the peso has weakened by P4.23 or 8.29% from its Dec. 31, 2021 close of P51 per dollar.
This is the local unit’s weakest close in more than 16 years, or since Oct. 25, 2005 when it closed at P55.26 versus the greenback.
“The translation of a 1% change in the exchange rate will be about .05 to 0.1% addition to the inflation rate… We are a lot more concerned about the inflation effects of a more depreciated peso given that we already have very high inflation,” Mr. Medalla said. — K.B.Ta-asan