Surprise interest rate hike

PHILIPPINES - In Brief 14 Jul 2022 by Romeo Bernardo

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After telling reporters some weeks ago that he preferred to do interest rate hikes 25bp at a time, Governor Felipe Medalla announced today that the Monetary Board decided to raise policy rates by a hefty 75bp in an off cycle move. This followed two separate 25bp increase in the last two months and brings the key overnight borrowing rate to 3.25% effective immediately. In his statement, the governor justified the “urgent action” as a response to sustained and broadening price pressures and “is intended to help manage spillovers from other countries that could potentially disanchor inflation expectations.” The latest inflation print for June showed more evidence of food and energy price shocks spreading to other items in the CPI basket. Today’s decision is likely precipitated by the combination of an accelerating US inflation, which reached 9.1% in June and is expected to prompt more aggressive Fed tightening, as well as the continuous depreciation of the peso in recent weeks, reaching its weakest yet at P56.45/$ in today’s morning trade. The interest rate hike also signals the BSP’s reduced appetite for further declines in its gross international reserves which have fallen from $108.8 billion at the end of last year to $102 billion at the end of June. After the announced rate hike, the peso strengthened closing at P56.15/$ while equities recovered most of the day’s losses but still closed lower than yesterday.