BSP Gov. Medalla says rate hikes 'working' in stabilizing peso

Jessica Fenol, ABS-CBN News

Posted at Aug 05 2022 05:16 PM

MANILA - The successive interest rate hikes implemented by the Bangko Sentral ng Pilipinas (BSP) appear to be working in stabilizing the peso, which in turn could help improve inflation, BSP Governor Felipe Medalla said Friday.

In July, the Monetary Board implemented an off-cycle 75-basis point rate hike. This followed the 2 earlier 25-bps hikes in the previous meetings. 

So far, the benchmark policy rate has increased by a cumulative 125 bps, which brought the total to 3.25 percent. 

“Because of the US monetary policy, the dollar became king again. This has resulted in many currencies' depreciation, not only the peso,” he said.

The US Federal Reserve has been implementing aggressive hikes to temper inflation that reached all-time highs.

The peso earlier breached the P56 mark in July before reverting back within the P55 level. Medalla said the unusual 75-bps hike helped buoy the local currency.

On Aug. 5, the peso closed at P55.2 against the dollar, according to the data by the Bankers Association of the Philippines.

"It worked, the peso stabilized…the intended effect in the increase in interest rate is to slay inflation. One of the ways of doing that is to stop depreciation of peso," the governor said. 

For the next meeting on Aug. 18, Medalla reiterated that an increase between 25-bps and 75-bps could be expected. 

However, he recognized that the "unintended effect" of upward adjustments is that it could temper economic growth. But it is unlikely to become a problem with the current recovery rate, he added.

“The possible unintended effect we’re afraid of is that recovery will be nipped in the bud. [But] these increases we have done so far, even if we do more later on, will not prevent the economy from growing," he said.

The economy expanded by 8.3 percent in the first quarter, which is among the fastest in the region. Economist have said the second quarter growth could be higher due to the election spending.

Meanwhile, inflation, which the rate hikes aim to address, could settle at 5 percent in 2022 largely due to global price pressures, Medalla said.

He also said the current economic growth rate can outpace the country's debt. The country's sovereign debt stock reached P12.79 trillion as of the end of June. 

Medalla, however said, global risks could bite into growth, thus the need for a "safety margin." 

For the Philippines, its robust gross internal reserves (GIR) is the safety blanket to deal with unforeseen global challenges.

The country's GIR was at $102 billion in June, which is enough buffer equivalent to 8.5 months' worth of imports of goods and payments of services and primary income. It is also about 7.3 times the country's short-term external debt based on original maturity.

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