Bangko Sentral may hike rates by 50 basis points after Fed move: BPI

ABS-CBN News

Posted at Jun 16 2022 03:33 PM

MANILA - The Bangko Sentral ng Pilipinas may hike its benchmark rate by 50 basis points in its meeting next week following the US Federal Reserve’s aggressive 75-basis point rate hike, the Bank of the Philippine Islands said on Thursday.

BPI said it makes more sense for the BSP to hike rates swiftly to keep up with the Fed.

“Hiking the policy rate gradually in contrast to what the Fed is doing may exacerbate the headwinds affecting the Philippine economy,” BPI said in a statement. 

The Ayala-led bank added that a very narrow gap between US and Philippine interest rates will likely exert more pressure on the peso, which will eventually translate to more inflation. 

“Consumer prices are likely more sensitive now to exchange rate movements since the economy is becoming more reliant on imported products like oil, rice, and pork,” BPI said. 

Since the start of the year, the peso has shed almost 2.50 to the dollar.
The peso closed at 53.435 at the end of Wednesday’s trading. At the start of the year, the local currency was trading at 50.99 to the dollar, while it was at 48.03 on June 15 last year. 

“A higher inflation print in the future may force the BSP to do bigger rate hikes and even inter-meeting rate hikes that may cause volatility in the markets,” the bank said. 

The lender also warned that the country’s gross international reserves will become more vulnerable if the BSP doesn’t hike more aggressively. 

“We expect a substantial decline in foreign reserves in this scenario as the BSP will have to sell dollars in order to temper the depreciation caused by the narrowing interest rate differentials.”

BPI warned that this may affect the country’s credit rating as the Philippines’ strong external position is one of the reasons why rating agencies have not downgraded the Philippines. 

The bank said the economy has “enough cushion” to absorb the rate hikes as GDP grew 8 percent in the first quarter and the jobless rate was down to 6 percent. 

The bank added that it expects the peso to further weaken with imports increasing as the economy recovers, and as dollar supply tightens with the Fed expected to continue to hike aggressively this year.

The BSP made a surprise 25 basis point rate hike last month as inflation quickened to 4.9 percent in April. But inflation has shown no signs of slowing, and further accelerated to 5.4 percent in May. 

The BSP’s Monetary Board is set to meet on Thursday, June 23 to decide on interest rates. 

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