BSP sounded alarm with snap rate hike
This action was taken ahead of the regular Monetary Board meeting, underscoring the urgency of addressing the escalating price levels
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This action was taken ahead of the regular Monetary Board meeting, underscoring the urgency of addressing the escalating price levels
The Bangko Sentral ng Pilipinas, or BSP, took a decisive step of raising its benchmark interest rate by 25 basis points last week, setting it at 6.5 percent.
Stock brokerage firm AB Capital Securities said BSP took the step as a response to the pressing issue of surging inflation.
"This action was taken ahead of the regular Monetary Board meeting, underscoring the urgency of addressing the escalating price levels," according to AB Capital.
BSP sounded the alarm when September's inflation rate spiked to 6.1 percent, a significant leap from the preceding month's 5.3 percent.
"Additionally, interest rates for overnight deposit and lending facilities were also raised, reaching 6 percent and 7 percent, respectively, from 5.75 percent and 6.75 percent," according to the brokerage firm.
Before the off-cycle rate hike, the BSP had maintained its policy rate at 6.25 percent since March 2023, marking a pause in rate adjustments.
AS Capital views the interest rate hike as a move that was widely expected and as a proactive measure taken by the Monetary Board to manage inflation expectation.
"The policy also has several implications," AB Capital reported.
"The Monetary Board's rate hike will likely provide essential support to the currency relative to the US dollar, which, in turn, offers a degree of protection to businesses holding substantial dollar-denominated debt, such as San Miguel Corp.," according to the brokerage firm.
Higher interest rates can limit inflation by discouraging borrowing and spending, although their full impact on inflation and the economy may take between 9 and 12 months to materialize, AB Capital added.
Investment may slow down
The rate hike can also lead to a reduction in investment activity, lower productivity, and slower gross domestic product, or GDP, growth, as it negatively impacts bank lending.
AB Capital said the banking sector, which has been benefiting from higher net interest margins, may start to feel the pinch of higher rates as obtaining credit becomes more challenging and costly.
Bank lending growth has steadily been declining since it peaked at 13.9 percent last October 2022 and is now at its slowest rate in nearly two years at 7.2 percent.
In addition, the affectivity of monetary policy to address inflation may be limited as domestic inflation is primarily driven by supply-side factors. Consequently, while the rate hike aims to curb inflation, it may simultaneously result in economic growth deceleration and present challenges for consumers due to pricier loans, influencing the overall economic landscape.
As for the local currency, the BSP's latest move takes the interest rate differential with the Federal Reserve back to 100 bps, which is within the 100-150 bps range that is typically the norm.
This should take some pressure off the peso which has lately been repeatedly testing the 57 per $1 level that the BSP vowed to defend.
"Multiple factors, such as imports, foreign fund outflows and remittance inflows, could affect the demand and supply dynamics in the dollar market, but we see these factors mostly cancelling each other out, resulting in a more stable peso," the brokerage firm explained.
This should be a positive development for net importing companies, particularly food manufacturers which have been showing signs of margin compression in recent quarters.
"Overall, while we do not expect the exchange rate to return to 55 per $1 levels anytime soon, at least it is now less likely to breach 57," AB Capital said.
"This would also prevent the BSP from burning through its dollar reserves in its efforts to defend the peso," it added.
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