BSP open to mega rate hikes to arrest peso’s decline

MANILA— The Bangko Sentral ng Pilipinas on Wednesday said it’s willing to initiate more aggressive rate hikes to prop up a weakening peso, which is bringing in more imported inflation in the country.

“If we see that the exchange rate is overshooting too much, and that selling foreign exchange will not make the problem go away, we would clearly consider may be increasing policy rates by more than our planned 25 basis points,” incoming BSP Governor Felipe Medalla was quoted as saying in a report by Bloomberg.

The next rate-setting meeting of the Monetary Board is on August 18. It will be presided by Medalla as outgoing Governor Benjamin Diokno performs his new role as finance secretary under the Marcos Jr. administration.

Earlier this month, the central bank hiked its policy rate for the second time this year by another 25 basis points, as inflation soars above the government’s 2-4% target. The magnitude of the adjustment was consistent with Medalla’s stance that the tightening must be “gradual” to avoid sinking the economy back to recession.

However, some analysts believe the BSP should mount a bigger assault on inflation. This, as the US Federal Reserve’s jumbo rate increases power up the US dollar and hammer Asian currencies, including the peso.

Since the beginning of the year, the local currency has lost over 7% to breach the P55-per-dollar level, the lowest in over 16 years. This could create a big headache for the BSP amid rising world oil prices as a result of the Russian-Ukraine war. Already, The BSP expects inflation to average 5.6% in the second half of the year partly due to rising public transport costs.

For Nicholas Mapa, senior economist at ING Bank in Manila, the BSP may unleash a more forceful tightening should the peso plummet to as low as P55.314 against the greenback. On Wednesday, the local currency finished trading at P55.06.

“With inflation expectations out of whack and second round effects evident, the case for front loaded rate hikes becomes immediate,” Mapa said in a Viber message.

“Monetary policy operates with a lag and thus potent and punchy rate hikes are required to steady the ship and get a hold of runaway inflation expectations,” he added.

Separately, Domini Velasquez, chief economist at China Banking Corp., believes a 50 basis points increase in one go will already be considered a “jumbo hike” for the BSP.

“Looking at recent years, especially 2018 when the BSP tightened aggressively amid a high inflation environment, BSP only raised a maximum of 50 basis points in any one meeting,” Velasquez said in a Viber message.