BSP’s tethered response
For its part, the BSP has acknowledged that it looks to the Fed’s decisions more than those of any other central bank in the world, with US monetary policy often influencing its own decisions.
“The world is interconnected,” BSP Governor Eli Remolona Jr. said in a May television interview.
“But the one that affects us the most is the easing or hiking cycle of the Fed’s monetary policy. So we watch that and its implications for the world and the global economy,” he added.
The BSP has hiked rates three times since the escalation of tensions in the Middle East in March. American and Iranian forces have continued to exchange strikes since the BSP’s latest hike at the end of August, with its key policy rate now standing at 5 percent.
The Philippines’ higher interest rates relative to the US should, in theory, support the peso and help temper inflation, albeit at the cost of slower growth and potentially more volatile capital flows. However, despite relatively higher domestic rates, the peso has remained weak, sliding closer to the P63 level in recent weeks as foreign exchange markets priced in the increasing likelihood of the Fed’s latest hike.
With the Fed’s latest increase, the policy rate differential stands at 1 to 1.5 percentage points. A narrowing gap could increase pressure on the currency, raise imported costs and limit the BSP’s flexibility to cut rates.
The Fed is mandated to pursue maximum employment and price stability. Its interest-rate decisions are aimed at balancing those objectives, with lower rates generally supporting economic activity but potentially adding to inflationary pressure, while higher rates tend to slow demand and price growth. The BSP follows a similar approach, although its mandate focuses on price stability rather than unemployment.
