Medalla says: ‘Dangerous’ to cut rates faster than Fed

BANGKO SENTRAL ng Pilipinas (BSP) Governor Felipe M. Medalla said on Wednesday it is “dangerous” to cut benchmark rates faster than the US Federal Reserve’s easing because it might cause the peso to further depreciate against the dollar.

“If US inflation is sticky and the cuts are slow, it’s very dangerous for the Philippine central bank to cut faster than the US even if its inflation is falling faster,” he told reporters on the sidelines of a BSP event in Pasay City.

If the Philippines’ benchmark interest rate is lower than the US Fed, Mr. Medalla noted investors might flock to the dollar, putting more pressure on the peso.

The Monetary Board has raised borrowing costs by 425 basis points (bps) since May last year, bringing the key rate to 6.25%.

The US Federal Reserve, on the other hand, hiked the Fed fund rate by 25 bps to 4.75-5% last month. The Fed has raised the rate by 475 bps since March 2022.

Asked if the BSP will raise interest rates next month if the Fed continues its tightening cycle, Mr. Medalla said there is no need to mirror the US Fed because Philippine inflation is seen to slow within the target by yearend. 

Headline inflation eased to a six-month low of 7.6% in March from 8.6% in February. This brought the first-quarter inflation average to 8.3%.

The BSP’s full-year inflation forecast is 6%, although it expects inflation to return to the 2-4% target by the fourth quarter.

The Monetary Board is scheduled to meet on May 18, while the US Federal Reserve is set to discuss policy on May 2-3.

“If inflation will fall to 3% [by the end of the year], how can you justify an interest rate of 6.25%? From that point of view, we should at least not match the Fed. Even if they raise theirs, we may not have to raise ours,” Mr. Medalla said in mixed English and Filipino.

“Now, will that cause an overly weak peso? Maybe not because the markets know we have more than enough reserves,” he said, adding that the central bank could participate in the foreign exchange market to mitigate the impact of the strong dollar.

The peso closed at PHP 55.62 a dollar on Wednesday, eight centavos weaker than Tuesday’s PHP 55.54 finish, based on data from the Bankers Association of the Philippines.

Latest central bank data showed the country’s gross international reserves had inched up by 2% to USD 100.2 billion as of end-March from USD 98.2 billion at end-February.

Mr. Medalla said the Philippines likely expanded by 6% in the first quarter, lower than 8.2% a year earlier and 7.1% in the fourth quarter of 2022.

“Lower than last year, but not too much,” he said.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said headline inflation might ease to 6.9% in April, and this would likely prompt the Monetary Board to pause on May 18.

“A print below 7% could be enough to elicit a pause from the BSP at the May policy meeting,” he said.

Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said the BSP might still hike policy rates by 25 bps next month.

“We continue to expect one last BSP policy rate hike of 25 bps in May to 6.5% before the pause-and-hold, to enable nominal interest rates to stay relatively neutral or close to the inflation outlook this year running at 6% if not higher,” he said.

April inflation data are scheduled to be released on May 5. — By Keisha B. Ta-asan, Reporter