Possible interest rate increase – Medalla

Philippine Central Bank Governor Felipe Medalla. FILE TMT PHOTO

Felipe Medalla, Governor of BANGKO Sentral ng Pilipinas (BSP), said that recent developments could lead to a further 150 basis points increase in the central bank’s benchmark interest rates this year.

“I won’t rule out the possibility – of course, it’s all very data dependent – ​​I don’t rule out raising the key rate by another 150 basis points by the end of the year,” he said on Tuesday in an interview with Bloomberg TV. .

Medalla said the situation in developed countries and supply shocks made it more necessary for the BSP to end the very unconventional monetary policy in the Philippines that was required due to the pandemic.

He added that the Monetary Board is ready to raise policy rates by at least 25-50 basis points on August 18 at its fifth rate-setting meeting.

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Bangko Sentral has already raised its benchmark interest rates by 25 bps in a row in May and June as part of the normalization of monetary policy, pushing borrowing, lending and overnight deposit rates to 2.50%, 2% and 3% respectively.

On the other hand, given more than three years of high inflation in June, local and foreign analysts believe that the central bank will pursue an aggressive monetary policy.

Economists at Rizal Commercial Banking Corp. (RCBC), Bank of the Philippine Islands (BPI) and HSBC provided their comments after the government announced that the inflation rate reached 6.1 percent last month, the highest level since October 2018, when it reached 6.9 percent.

Commenting on the most recent inflation data, RCBC Chief Economist Michael Ricafort said: “This will continue to support any further potential local interest rate hike amid negative net interest rates. [i.e. interest income not enough to cover the adverse effects of inflation] supported in part by excess liquidity in the financial system.”

For their part, BPI analysts said higher inflation readings in the coming months could create a scenario in which BSP would be forced to make larger jumps, as it did in 2018.

According to them, “a 50 basis point increase in the discount rate now, rather than later, could help mitigate the risk of larger increases in the future, which could cause more volatility in the markets.”

With Bangko Sentral hinting that it could raise its discount rate to 3.50%, the decision to switch gears will primarily depend on how the currency reacts, said Aris Dakanai, an economist at HSBC with the Association of Southeast Asian Nations.

“If the news takes some of the pressure off the currency, then the BSP is likely to stick to its gradual rally plan.” [or by increments of 25 bps] up 3.50 percent at the last four meetings of the Monetary Board,” he added.