BSP will match Fed’s 75 bps hike

The US Federal Reserve's latest move to jack up interest rates to tame surging inflation worldwide would eventually achieve its intended effect, analysts said on Thursday.

For the country, the move will have a stabilizing effect on the peso.

In an emailed report, Rizal Commercial Banking Corp. chief economist Michael Ricafort said the latest signals for a local policy rate hike of as much as 0.75 basis points on the next rate-setting meeting on 17 November 2022 from the current 4.25 to 5 percent would help "stabilize" the peso exchange rate, actual inflation and price expectations, on top of other measures in the policy tool kit.

"However, the Fed signaled that the rates ceiling would go higher vs earlier estimates, but could involve smaller Fed rate hikes as early as 14 December 2022 or the one after that; as the Fed reiterated its resolve to significantly bring down elevated US inflation from 40-year highs to the target of 2 percent and signaled that it is very premature to pause Fed rate hikes," Ricafort indicated.

Bangko Sentral ng Pilipinas Governor Felipe Medalla said the BSP will follow through with a similar policy rate increase in its next policy meeting on 17 November 2022.

"The BSP deems it necessary to maintain the interest rate differential prevailing before the most recent Fed rate hike, in line with its price stability mandate and the need to temper any impact on the country's exchange rate of the most recent Fed rate hike," Medalla added.

The BSP embarked on a series of rate hikes since May to scale back its accommodative monetary policy stance.

Positive signals

According to Ricafort, the "clear and specific signals" from local authorities have been unprecedented in a positive manner, in terms of greater transparency and forward-looking/guiding in nature.

The latest move, Ricafort said, would thereby promote stability for the local economy and financial markets, as well as create an environment more conducive to better planning and preparations for businesses/industries, consumers, other institutions, and the general public.

For her part, Chinabank chief economist Domini Velasquez said that the BSP is expected to follow the Fed's movement with a 75 bps hike for November.

"The statement of Gov. Medalla before markets opened, giving certainty on the size of the rate hike on 17 November likely tried to preempt the foreign exchange market from reacting, i.e. peso depreciating before the monetary board meeting," Velasquez told Daily Tribune.

"Crucial in Powell's statement is that they see the terminal rate of the US higher than their September meeting," added Velasquez.

She added that BSP will "need to increase" the policy rates until next year if they "will maintain the 100 bps interest rate differential."