BSP must brace for US policy tightening – analysts


By Luz Wendy T. Noble, Journalist

The BANGKO Sentral ng Pilipinas (BSP) should be ready to act as the US Federal Reserve is poised for further rate hikes this year and domestic inflation is expected to remain elevated over the coming months.

The Fed’s 50 basis point rate hike, coupled with a possible reduction in a $9 trillion portfolio of assets, reflects its ‘seriousness’ in tackling four-decade high inflation in the states States, said former BSP Deputy Governor Diwa C. Guinigundo. .

“For investors and credit rating agencies monitoring interest rates differentials across countries, that the U.S. Fed’s decision could encourage more capital flin the US, away from some emerging markets with lower real interest rates,” Guinigundo said in a Viber message.

“Although our local real interest rate is higher, other factors are also taken into account, such as growth prospects, currency movements and political prognoses,” he added.

Sophia Ng, analyst at Mitsubishi UFJ Bank Global Markets Research, also sees the possibility of capital flight, but said it might be more manageable for the Philippines.

“The saving grace for the Philippines, in my view, is the relatively low foreign participation in the stock and bond markets compared to other emerging economies in Asia, which means that the downward pressure on the peso from the exit potential capitalflows is likely to be more modest than other AXJ currencies (Asia excluding Japan) which are more sensitive to portfolio outflows,” Ms Ng said in an email.

With central banks now also having to deal with inflation risks caused by the Russian-Ukrainian war, when to start policy tightening has become more crucial, experts said.

“I don’t want to preempt future BSP moves, but these decisive actions by the US Fed should make all other central banks think about the question of timing,” Guinigundo said.

“A slight token move can assure the market that monetary policy is aware of the situation and doing something,” he added.

Bank of the Philippines Chief Economist Emilio S. Neri, Jr. said the Fed’s latest statements strengthen the case for BSP to stand by given that the Fed ” seems to be still far behind the curve” in terms of policy tightening to fight inflation.

Mr Neri said central banks, including the Fed, which had initially deemed inflation risks to be “transient” last year may now have to increase aggressively over the next six to 18 months due to the rising import bill. for oil, the rise in commodity prices.

“BSP may need to take preventive action, such as raising rates between meetings to avoid the consequences of getting more surprises from the US central bank,” Neri said in a Viber message.

He said an exitflfund flow combined with faster inflation will affect the strength of the peso.

The local unit closed strong 11.5 centavos at 52.385 pesos on Thursday from 52.50 pesos on Wednesday, based on data from the Philippine Bankers Association. However, the peso weakened 2.7% from its late 2020 finish of P50,999.

The Fed tightening comes at a time whenflin the Philippines, which should prompt the central bank to prepare a monetary policy response, said Security Bank Corp. chief economist Robert Dan J. Roces.

Headline inflation accelerated to a three-year high of 4.9% in April as the costs of food, utilities and transportation continued to rise.

“With locals inflation well above target and on track to remain so, the buildup of price pressures will require preemptive control from monetary authorities,” Roces said in a Viber message.

He expects the BSP to start raising rates by around 25 basis points in the second quarter, followed by three more increases of 25 basis points in the third and fourth quarters of 2022.

The BSP expects inflation to exceed the 2-4% target at 4.3% for 2022.

The Monetary Council has kept its key rate at a historically low level of 2% since November 2020 to support the recovery of the economy.

BSP Governor Benjamin E. Diokno said last month that he could consider a rate hike by June, when more data on economic growth and employment becomes available to prove the recovery is stronger. solid.

The Monetary Board will conduct its next policy review on May 19.

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