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Further hikes in BSP rates to back PH peso: economist

By Joann Villanueva

August 19, 2022, 8:34 am

<p><strong>PESO SUPPORT.</strong> Rizal Commercial Banking Corp. chief economist Michael Ricafort said Thursday (Aug. 18, 2022) that further hikes in the Bangko Sentral ng Pilipinas' key policy rates are not only intended to address the accelerating inflation rate but also help buoy the Philippine peso and address interest rate differentials with the US. The Federal Open Market Committee will have another meeting in September and is widely expected to hike rates by as much as 75 basis points. <em>(Photo courtesy of RCBC)</em></p>

PESO SUPPORT. Rizal Commercial Banking Corp. chief economist Michael Ricafort said Thursday (Aug. 18, 2022) that further hikes in the Bangko Sentral ng Pilipinas' key policy rates are not only intended to address the accelerating inflation rate but also help buoy the Philippine peso and address interest rate differentials with the US. The Federal Open Market Committee will have another meeting in September and is widely expected to hike rates by as much as 75 basis points. (Photo courtesy of RCBC)

MANILA – An economist has forecast further hikes in the Bangko Sentral ng Pilipinas’ (BSP) key policy rates even with the 50 basis point increase on Thursday, citing the need to address interest rate differentials with the Federal Reserve.

Rizal Commercial Banking Corp. (RCBC) chief economist Michael Ricafort, in a report dated August 18, said the latest increase in the BSP’s key rates is a pre-emptive move as the Federal Open Market Committee is projected to hike the Fed’s key rates by 50 basis points to 75 basis points during its meeting on September 21.

“Any additional local policy rate hike/s in the coming months would still be largely a function of any further Fed rate hikes, more than anything else, given the impact on the global currency market,” he said.

Ricafort said further jumps in the Fed rates, which would be between 2.25 percent and 2.50 percent, “would make the interest rate differential in favor of the US dollar and would still make the current 3.75 percent local policy rates unusually close to the Fed funds rates by then.”

He said the off-cycle 75 basis points increase in the BSP rates in July was made partly to help stabilize the local currency, which at that time had slid to the 56-level against the US dollar.

Addressing the extreme volatility of the exchange rate is part of the central bank’s price stability mandate, Ricafort said.

“This would also help better manage/anchor both actual inflation and inflation expectations,” he added.

The rate of price increases remains on the uptrend, with the July 2022 figure rising to 6.4 percent, the highest since October 2018.

Ricafort said the “weaker peso exchange rate is inflationary” and adds to the high cost of imported fuel and other commodities.

He said aside from addressing the elevated inflation rate and interest rate differential with the US, further hikes in the BSP’s key rates are seen to address second-round effects, or the resulting events of elevated inflation, such as an increase in minimum transport fare and wages, and narrow the negative interest rate returns.

He added that while non-monetary measures are seen to address supply constraints that push inflation higher, it “could be complemented by outright policy rate hike/s.” (PNA)

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