BSP policy rate could reach 6.5% this year
THE BANGKO SENTRAL ng Pilipinas (BSP) could hike benchmark interest rates by 50 to 100 basis points (bps) this year to bring down inflation and match the US Federal Reserve’s monetary tightening in support of the peso.
“The BSP will probably continue to hike as long as the Federal Open Market Committee (FOMC) continues to hike to avoid a repeat of the exchange rate-led inflationary episode in 2022,” Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said in a Viber message.
“Our latest estimate is between 6% and 6.5% for the policy rate. This assumes significant weakening of the US economy in early 2023 causing wage increases there to fall significantly,” Mr. Neri said.
The Philippine central bank hiked borrowing costs by 350 bps in 2022, bringing its key rate to a 14-year high of 5.5% from a record low of 2% in 2021.
Meanwhile, the Fed raised rates by 425 bps last year, bringing its own policy rate to 4.25-4.5%. Fed policy makers have said the US central bank will continue tightening this year to battle inflation.
“Unfortunately, if US wage growth remains elevated until mid-2023 the FOMC’s hiking cycle may end much later than what markets currently expect and will mean an even higher terminal rate for the BSP,” Mr. Neri said.
He also noted that if the FOMC pauses its policy tightening this year, and if Philippine inflation falls within the 2-4% target range, the BSP may consider a pause in hikes.
BSP Governor Felipe M. Medalla this month signaled more rate increases at the BSP’s first two policy meetings this year to ensure inflation will fall within the central bank’s target range. The first policy meeting for the year is scheduled on Feb. 16.