Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla said that they will likely raise the central bank’s key interest rate by 75-basis points or 0.75% in the next meeting. He clarified that this is not an off-cycle decision as it will be made effective after BSP\u2019s policy meeting on November 17.<\/p>\n\n\n\n
The hawkish move of the BSP was in reaction to the US Fed raising 75-basis points (0.75%) last week, which effectively thinned the interest rate differential with the Philippines and put pressure on the Philippine Peso. The government previously said that it will maintain a 100-basis points differential with US policy rates to ensure foreign exchange stability.<\/p>\n\n\n\n
A weak Peso will continue to put pressure on inflation as the company is a net importer. October inflation, which is expected to come out later today, is expected to clock in at 7.3%.<\/p>\n\n\n\n
Currently, the Philippine policy rate is only 25-basis points (0.25%) over the US benchmark rate. This spread is 2.6 standard deviations below the ten-year average gap. It is a significant spread historically but relatively smaller against most Asian nations that have spreads averaging over three standard deviations from their mean. However, the interest parity risk and its impact on the capital account is only one angle that can affect the Peso.<\/p>\n\n\n\n
The BSP also has to contend with the rising current account deficit. Imports, which has been growing in the double-digits, have been rising faster than exports, which has been contracting. The BSP is keen on addressing the speculative play on the foreign exchange market.<\/p>\n\n\n\n
However, its ultimate goal is to bring inflation toward their target band of 2% to 4% by the second half of 2023. The hawkish reaction of the BSP should support the Peso from speculative attacks while taming domestic demand.<\/p>\n\n\n\n