BPI: “Hiking the policy rate gradually in contrast to what the Fed is doing may exacerbate the headwinds affecting the Philippine economy.”
BPI — On Thursday, the Bank of the Philippine Islands said that the Bangko Sentral ng Pilipinas (BSP) may increase its benchmark rate by 50 basis points in its meeting next week following the United States Federal Reserve’s 75-basis point rate hike.
According to the Ayala-led bank, it makes more sense for the central bank to increase rates swiftly in order to keep up with the Fed.
The bank also said that a very narrow gap between US and PH interest rates will likely exert more pressure on the Philippine peso, which will eventually translate to more inflation.
“Hiking the policy rate gradually in contrast to what the Fed is doing may exacerbate the headwinds affecting the Philippine economy,” the Ayala-led bank said in a statement. “Consumer prices are likely more sensitive now to exchange rate movements since the economy is becoming more reliant on imported products like oil, rice, and pork.”
ABS-CBN News reported that the Philippine peso has shed almost 2.50 to the dollar since the start of 2022. Based on a report, the Philippine peso closed at 53.435 at the end of Wednesday’s trading.
The bank added that a higher inflation print in the future may force the central bank to do bigger rate hikes and to even inter-meeting rate hikes that may cause volatility in the markets.
Also, the bank warned that the Philippines’ gross international reserves will become more vulnerable if the central bank doesn’t hike more aggressively.
“We expect a substantial decline in foreign reserves in this scenario as the BSP will have to sell dollars in order to temper the depreciation caused by the narrowing interest rate differentials,” the bank said.