A third 50bps

PHILIPPINES - In Brief 22 Sep 2022 by Romeo Bernardo

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Following the US Fed’s third outsized rate increase of 75bp yesterday, the Monetary Board in its regular meeting today responded with its third 50bp increase for its set of policy rates. Today’s move brings the key overnight RRP rate to 4.25% compared with the fed funds target rate of 3% to 3.25%. (Chart 1) In its statement, the BSP cited broadening price pressures with rising core inflation reflecting second round effects from wage and transport fare increases as well as emerging demand side pressures. Today’s rate hike, it says, is meant “to anchor inflation expectations and prevent price pressures from becoming further entrenched.” The BSP also nudged up its inflation forecast for 2022 (from 5.2% to 5.6%) and 2023 (from 4% to 4.1%) but expects the headline rate to fall back to target by 2024 (forecast of 3%). Today’s 50bps rate increase has been widely expected with all eyes trained on the peso’s sharp depreciation in recent days. The exchange rate shot past P58/$ yesterday and closed at P58.49/$ today. Based on BSP senior officials’ responses to journalists, the BSP appears disinclined to more aggressively defend the peso given that: (a) the peso’s losses largely reflect dollar strength with other regional currencies also depreciating (Chart 2), and (b) part of the peso’s weakness also reflects a fundamental deterioration in external balances, particularly the sharp increase in the current account deficit (Chart 3). As it is, the BSP has seen its foreign exchange reserves drop by over $11 billion since December 2021, although at $97.4 billion at the end of August, still provides ample coverage for imports and debt servicing requirements. We expect a challenging per...