BSP chief cites importance of interest rate differential with US

Ensuring adequate interest rate differential between the Philippines and the US will help put market uncertainties at bay, Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla said. In an interview over CNBC on Friday, Medalla said the current 1.25 percent difference between the BSP’s overnight reverse repurchase (RRP) rate and the Federal Reserve’s 5-5.25 percent key rate is what ‘the market seems to think that its appropriate differential between our policy rate and the US policy rate.’ When asked how long will the BSP can hold its key rates steady after the policy-making Monetary Board (MB) on Thursday maintained the central bank’s rates, Medalla said that ‘if inflation were purely a domestic issue, the pause will probably be no longer than two or three meetings.’ ‘But what we’ll have to be very vigilant about is the extent to which a small differential between our policy rate and the Fed’s could cause significant weakening of the peso, which may actually become the new anchor of inflationary expectations,’ he said. Thus, Medalla said that any developments overseas that will affect domestic rate of price increases and result to second round effects are factors that the BSP will definitely consider vis-a-vis its policy stance. ‘It’s prudent to pause (but) at the same time it doesn’t make sense to raise because, as already pointed out, if you look at the month-on-month inflation that’s actually quite low already. In fact, it’s slightly negative,’ he said. The MB’s decision on Thursday to pause the central bank’s rate hiking cycle, which started in May 2022 and has resulted to the 425 basis points increase in the key rates, is the first time that the BSP did not mirror the Fed’s move, which is a rate hike earlier this month, after noting the deceleration in domestic inflation rate. After hitting its 14-year high of 8.7 percent last January, domestic rate of price increases has slowed and registered a 6.6 percent annual rate last April. Monetary officials forecast monthly inflation rate to return to within the 2-4 percent target band of the government in the last quarter of the year. Medalla believes that a 75 basis points interest rate differential with the US is appropriate for the Philippines if the country’s foreign reserves is already around USD120 billion. As of last April, the country’s foreign reserves amounted to USD101.51 billion, which is equivalent to around 7.6 months worth of imports and payment of services, higher than the international standards of around three to four months. ‘So, it’s the market that really determines what differential will result in a peso that is not depreciating too much, a more stable peso,’ he said, noting that what he thinks is the market’s preference is for a differential rate of between 100 to 125 basis points. He said that ‘if we will try to change the mind of the market, that we can live with a smaller one I think that’s the next dialogue with the market.’ ‘But as it is, we will be a bit too reckless if we will ignore the market on this regard,’ he added. To date, the peso is trading at 55-56 level against the greenback, an improvement after it dipped to record-low 59.00 to a dollar level several times in September to October 2022.

Source: Philippines News Agency