BSP may consider rate hike in June

BSP may consider rate hike in June
Bangko Sentral ng Philippine Governor Benjamin E. Diokno will deliver a speech at the Philippine International Convention Center (PICC), Pasay City, on April 5. – PHILIPPINE STAR / GEREMY PINTOLO

THE Philippine central bank may consider raising interest rates in June as the economic recovery probably gained more traction in the first quarter, its governor said.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the May 19 political meeting will already take into account the first quarter gross domestic product (GDP), which will be released on 12 May.

“We will look at the new data and hopefully they will show the growth in the first quarter, maybe around 6-7%,” said Mr. Diokno for Bloomberg TV on Monday.

“And then, given that, we may be waiting for another cycle … We have another meeting in June. And maybe that is the time when we will consider the rise in political interest rates,” he added.

The BSP has kept interest rates at a record low since November 2020 to support the recovery of the Philippine economy after the pandemic.

Sir. Diocno’s latest statement is a departure from BSP’s previous signals that it will only begin adjusting interest rate adjustments in the second half of the year when it sees signs of a stronger economic recovery. Government officials expect GDP to return to its pre-pandemic level within the second half of the year.

The BSP chief said there is still “no evidence of second round effects [of inflation] from the demand side. ”

“I think we can affto await what will be the Fed’s move in the next two meetings, ”said Mr. Diocno.

The Fed’s next policy review is May 3-4. Fed Chairman Jerome H. Powell said they might raise interest rates by 50 basis points (50 bps) after the 25 bp rise in March.

Overall inflation in the Philippines accelerated to its six-month high of 4% in March, already matching the upper end of the target band of 2-4%.

The recent rise in oil and commodity prices has prompted groups to petition for higher transport prices and wages.

Senior economist Nicholas Antonio T. Mapa of ING Bank NV Manila said Mr Diocno’s latest signal is a step in the right direction to show BSP’s commitment to its price stability mandate.

The release of economic data for the first quarter is likely to strengthen the argument that BSP will raise interest rates on 19 May or 23 June.

“GDP in the first quarter is likely to be robust, driven by the resurgence of household consumption and to a lesser extent capital formation and public spending. In the meantime, inflation is likely to break target as early as April and continue to accelerate throughout the quarter,” said Mr. Mapa in an email.

Despite an Omicron-driven increase in coronavirus infections earlier this year, economic activity appears to have increased in February and March as restrictions were lifted. Metro Manila was downgraded to the most lenient alarm level from March.

Mr. Mapa said he expects BSP to cumulatively increase rates by 100 bps until the end of 2022, the first of which is a 25 bp increase.

“A policy adjustment may not do much to curb cost-pushing inflation, but a higher key interest rate will help stabilize the plummeting peso, which in turn will curb imported inflation,” he said. Map.

“In the meantime, although a tightening of policies would actually undermine some recovery by limiting further investment spending, we believe the recovery is sound and robust enough to withstand such an adjustment,” he added.

Meanwhile, UnionBank of the Philippines, Inc. said chief economist Ruben Carlo O. Asuncion that he is pricing a 25- to 50bp rate hike in June.

“With the more hawkish US Fed and the backdrop of more increases in the coming months to curb its own inflation increases, you do not want to be a step too late and find yourself struggling to keep up with the external environment,” said Mr. Asuncion said in a Viber announcement.

He noted how the dollar has recently strengthened against the peso amid Fed signals of more rate hikes.

At its close of P52.41 per dollar on Monday, the peso has weakened by 2.8% from the end of 2021 fi50,999 kr.

“We are not worried about the depreciation,” he said. Diokno and added that this is in line with the decline in other regional currencies.

Meanwhile, Mr Diokno said a reduction in banks’ reserve requirements (RRR) is still on the table.

Such a move is “not at all related to the crisis,” the BSP chief said, adding that he wanted to bring the RRR down to a single digit by the end of its 2023 term, even before the pandemic.

“It’s still on the table. We will allow them [banks] to lend the money instead of the central bank getting the money from them, ”he said.

The reserve requirement for large banks is currently 12%. – Luz Wendy T. Noble

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