BSP's Next Move in Focus Amid US Fed Hike Speculation, Analysts Divided

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) finds itself under scrutiny as speculation mounts over a potential interest rate hike by the US Federal Reserve. Analysts are divided on whether the BSP needs to further tighten its monetary policy and the timing of such a move. Jonathan Ravelas, senior adviser at Reyes Tacandong & Co., suggests that a US Fed rate increase could prompt an off-cycle hike by the BSP, potentially by 25 to 50 basis points (bp) as early as today. Ravelas posits that in a scenario where the Fed raises rates by 25 bp, a 50 bp BSP hike would serve a dual purpose: preserving the interest rate differential between the Philippines and the US with half the increase, and anchoring inflation expectations amid rising gasoline prices with the other half. The interest rate differential is crucial as it influences the relative attractiveness of peso-denominated versus dollar-denominated investments. “I wouldn’t be surprised if there is an off-cycle hike in reaction to the Fed,” Ravelas said. An off-cycle hike is an increase in the central bank’s benchmark interest rate outside a scheduled policy meeting. The benchmark influences borrowing costs for households and businesses. Ravelas said a 50-basis-point rate increase could be appropriate if the Fed raises rates by 25 basis points and further US tightening is expected in the fourth quarter. Under that scenario, he said, half of the BSP increase would preserve the gap between Philippine and US policy rates, while the other half would help contain inflation expectations amid rising gasoline prices. “The 25-basis-point (hike) is to maintain the differential. The 25-basis-point (hike) is to lock in inflation expectations,” Ravelas said. The interest rate differential is the gap between rates in the two countries, which can influence the relative appeal of peso and dollar investments. Ravelas said higher oil prices and US interest rates would keep pressure on the peso. Still, he framed his preferred BSP response primarily as a way to prevent expectations of future price increases from rising. He emphasized that a move outside the BSP’s regular schedule remained a possibility rather than a certainty. In contrast, Domini Velasquez, chief economist at Chinabank, sees neither a need nor a significant likelihood for an off-cycle hike. She argues that the BSP's decision will be more influenced by its inflation outlook and the economy's capacity to absorb higher borrowing costs. “Instead, the BSP’s decision will likely be driven more by its inflation outlook and the economy’s ability to absorb elevated interest rates,” she said. Velasquez said weak domestic demand leaves little justification for another increase in borrowing costs. “Our view remains that domestic demand is still too soft to warrant further tightening,” she said. Chinabank believes the BSP has likely finished raising rates, with anticipated weakness in third-quarter economic growth expected to weigh on its assessment. “We think the BSP has likely reached the end of its hiking cycle, with weak economic growth in the third quarter likely to be an important factor in its assessment,” Velasquez said. Meanwhile, Angelo Taningco, chief economist at Security Bank, anticipates another BSP rate increase of 25 bp at its October meeting but views the probability of an off-cycle hike as low. “The probability for a BSP off-cycle hike is low because the Fed rate hike is widely expected and priced in by the market already,” Taningco said. Taningco forecasts a 25-basis-point rate hike in October, bringing the benchmark rate to 5.25 percent, where he expects it to remain through year-end. The Federal Reserve's decision is expected Thursday morning, Manila time, keeping a close watch on the BSP's subsequent actions. Source: Philstar Business