BSP to prioritize inflation outlook over Fed rate hike

THE BANGKO SENTRAL ng Pilipinas (BSP) will focus on managing inflation expectations in its policy review this month, even as the US Federal Reserve delivered a smaller rate hike at its own meeting last week. 

“Next meeting will focus on inflationary expectations in (the Philippines), not the Fed’s 25-bp (basis point) rate increase,” BSP Governor Felipe M. Medalla said in a Viber message to reporters late Friday evening.

The Monetary Board (MB) will hold its first policy review meeting this year on Feb. 16.

The BSP earlier gave a 7.5-8.3% forecast range for January inflation. This means January would mark the 10^th straight month that inflation surpassed the BSP’s 2-4% target range.

A BusinessWorld poll of 15 economists last week yielded a median estimate of 7.6% for January, which if realized would be slower than the 14-year high of 8.1% in December.

January inflation data is scheduled to be released on Feb. 7.

The US central bank hiked its own policy rate by 25 bps last week. The rate hikes delivered by the Fed since March 2022 have now totaled 450 bps, bringing its own policy rate to a range between 4.5% and 4.75%, the highest since 2007.

“It’s good news as far as we’re concerned, instead of (Fed hiking by) 50 bps it’s 25 bps,” Finance Secretary Benjamin E. Diokno, who is also a member of the Monetary Board, told reporters on Friday. 

“The BSP is data dependent, we’ll look at data and inflation. We have a strong growth rate. So it will be decided upon by the MB,” he added.   

The Philippine economy expanded by 7.6% in 2022, surpassing the government’s 6.5-7.5% target for the year as well as the 5.7% growth in 2021. 

According to former BSP Deputy Governor Diwa C. Guinigundo, the Philippine central bank will likely match the Fed’s 25-bp rate hike last week.

“It’s crucial to keep the interest rate differential to avoid any foreign exchange (FX) outflows and resulting weakness in the peso. That could be inflationary and negative to our debt in FX when expressed in peso,” Mr. Guinigundo said. 

“We’re not out of the woods yet especially in the light of the BSP forecast that inflation will remain in breach of the 2-4% target for 2023. Inflation expectations may still be subject to sustained supply issues which are bound to continue in the near future. Thus, continued vigilance is demanded of the BSP,” he added.   

The BSP sees headline inflation averaging 4.5% this year, lower than the actual 5.8% recorded in 2022.   

“With the smaller raise of the Fed, markets are expecting an early pivot, adding optimism to emerging economies. We have seen some strengthening of emerging markets’ currencies (weaker US dollar), including the peso. Hence, the BSP will be less concerned about the peso’s depreciation and its impact on imported prices,” China Banking Corp. Chief Economist Domini S. Velasquez said.   

The local unit closed at PHP 53.68 against the dollar on Friday, up by 21.50 centavos from its PHP 53.845 finish on Friday. Year to date, the peso has strengthened by PHP 1.91 or 3.9% from its Dec. 29, 2022 close of PHP 55.755.

“Still, we expect the BSP to continue tightening, two more 25-bp rate hikes in its next meetings as domestic inflation continue to remain elevated. The priority will be to reduce additional repercussions of new inflation pressures such as higher water and electricity rates this January,” she said.   

Metro Manila’s two main water concessionaires began implementing higher rates in January. Manila Water Co., Inc. raised rates by PHP 8.04 per cubic meter, while Maynilad hiked rates by PHP 3.29 per cubic meter.   

“We think BSP will match (the Fed’s latest hike), with scope to slow down as growth remained strong and inflation’s trajectory pointing to tempering,” Security Bank Corp. Chief Economist Robert Dan J. Roces said.

“The central bank will still want to keep inflation in check without undermining growth which is projected to be one of the strongest in the region this year,” Mr. Roces added.

Mr. Medalla earlier signaled more tightening in the first quarter this year to ensure inflation falls within the 2-4% target range by the second half.

The Monetary Board last year raised interest rates by 350 bps to 5.5% to tame inflation. – Keisha B. Ta-asan, Reporter