A gradual tightening

PHILIPPINES - In Brief 17 Jun 2022 by Romeo Bernardo

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Following the US Fed’s large 75bp policy rate hike on Wednesday, BSP watchers are once more speculating whether the Monetary Board (MB), the policy-making body of the BSP, would take a more aggressive approach to raising its set of policy rates. Earlier, incoming BSP Governor Felipe Medalla, who will take over the reins from Finance Secretary-designate Benjamin Diokno by the end of the month, signaled that the MB will raise policy rates by 25bp in its meeting on June 23 and will likely increase rates by another 25bp in August. He added that depending on the data, four or five more rate hikes may be in store through 2023.[1] In the context of the impossible trinity, the challenge for markets is understanding how, given free capital mobility, the BSP would balance its desire to exercise policy independence (not match US rate hikes) against its goal of moderating sharp swings in the exchange rate to limit pass-through to domestic inflation at a time of already elevated prices for imported goods. Some analysts, observing narrowing interest rates differentials and the peso’s rapid weakening against the dollar lately (about 2% to P53.37 since end of May), are expecting a bolder 50bp rate hike next week. The belief is that unless the MB’s policy action tracks the US Fed’s moves more closely, inflation expectations will rise with a rapidly depreciating peso, risking the BSP falling behind the curve and losing its credibility at a time of extraordinary market stress. We saw this happened in 2018 when market sentiments increasingly turned negative over perceptions that the BSP was acting too slowly to tame inflationary pressures.[2] Will the MB take to heart this history lesson ...