BSP not ruling out 50 bps rate hike

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the Monetary Board may consider a one-time 50 basis points (bps) policy rate hike on Aug. 18 if inflation will increase higher than expected.

“We will think about it, depending on the inflation,” said Medalla. “The key really is what’s the momentum of inflation. (But as for) our ability to hit less than four (percent) next year, we will really need lots of luck,” he added.

Meanwhile, Medalla is projecting a “good” gross domestic product (GDP) performance for the second quarter. He believes it could be better than the first quarter because “people are almost unafraid of Covid”.

However, he said it will be difficult to match the 8.3 percent GDP growth in the first quarter due to base effects. “But at the same time I will not be surprised if GDP growth this year is seven percent. Our Nowcasts says second quarter is good,” said Medalla.

For the June inflation, the BSP forecasts a high of 6.5 percent and a low of 5.7 percent, still higher than May’s 5.4 percent.

The BSP projects an average inflation this year of five percent, exceeding the two percent to four percent government target for 2022 until 2024. For 2023, the BSP estimates 4.2 percent rate before inflation returns to within the target range in 2024 of 3.3 percent.

Medalla said an increase in inflation on a month-on-month basis is “scary” if it will mirror the rate of increase in April and May which will already indicate a strong momentum “that it may have already second-order effects.”

As for the exchange rate, the BSP chief said they are only interested in the spot market if the exchange rate will have a “major input” to inflation. “Of course a very, very large change in the exchange rate will affect inflation,” he said, without disclosing this level of the peso.

The peso depreciated to a 17-year low on Wednesday to close at P55.06 to the US dollar. On Thursday, June 30, the day of President Marcos inauguration, the peso had an intraday high of P55.14.

“If the exchange rate move too much, clearly it will affect inflation. But I will not say what is too much,” said Medalla.

The BSP implements an exchange rate policy that supports a freely floating exchange rate which means it will let market forces to determine the rate. However, the BSP will intervene to temper destabilizing swings in the exchange rate.

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