BSP must prepare for more US political austerity – analysts

By Luz Wendy T. Noble, Reporter

THE BANGKO Sentral ng Pilipinas (BSP) should be ready to act as the US Federal Reserve is ready for more rate hikes this year and domestic inflation is likely to remain high for the next few months.

The Fed’s 50 basis point hike, paired with a possible $ 9 trillion asset portfolio write-down, reflects its “seriousness” over the four-decade-high US inflation, said former BSP Deputy Governor Diwa C. Guinigundo.

“For those investors and credit rating agencies that monitor your interest ratesffacross countries that the US Fed movement could encourage more capital flowes to the US, away from some emerging markets with lower real interest rates, ”said Mr. Guinigundo in a Viber announcement.

“While our local real interest rates are higher, other factors are also considered as growth prospects, currency movements and political forecasts,” he added.

Sophia Ng, an analyst at Mitsubishi UFJ Global Markets Research, also sees the potential for capital flbut says this could be more manageable for the Philippines.

“The saving grace for the Philippines in my opinion is the relatively low foreign participation in both the stock and bond markets compared to other emerging economies in Asia, which means the downward pressure on the peso from potential capital out there.flows are likely to be more modest than other AXJ currencies (Asia except Japan) that are more sensitive to portfolio outflows, ”said Ms. Ng in an e-mail.

With central banks now also having to confront inflation risks caused by the Russia-Ukraine war, the timing of when to start tightening policy has become more crucial, experts said.

“I do not want to anticipate future BSP movements, but these crucial actions by the US Federal Reserve should make all other central banks think about the timing issue,” he said. Guinigundo.

“A small symbolic move can assure the market that monetary policy is aware of the situation and that it is doing something about it,” he added.

Bank of the Philippine Islands Leading Economist Emilio S. Neri, Jr. said recent Fed statements reinforce the argument that the BSP is ready, as the Fed “still seems to be far behind” in terms of policy tightening to fight inflation.

Sir. Neri said central banks, including the Fed, which originally considered inflation risks to be “transient” last year, may now have to rise aggressively over the next six to 18 months due to rising import bills for oil, rising commodity prices.

“The BSP may need to provide a preventative measure, such as an interest rate hike between meetings, to avoid the consequences of getting more surprises from the US Federal Reserve,” he said. Neri in a Viber message.

He said one outflow of funds combined with faster inflation will affect the strength of the peso.

The local unit closed stronger by 11.5 centavos to P52,385 on Thursday from P52.50 on Wednesday, based on Bankers Association of the Philippines data. Dog pesoen weakened by 2.7% from the end result of 2020 of P50,999.

The Fed’s tightening comes in at a time with faster inflin the Philippines, which should encourage the central bank to prepare a monetary policy response, said Security Bank Corp. chief economist Robert Dan J. Roces.

Overall inflation rose to its three-year high of 4.9% in April as food, supply and transport costs continued to rise.

“With locals infl“If we are well above target and ready to stay that way, building price pressures will require preventive control by monetary authorities,” Mr Roces said in a Viber statement.

He expects the BSP to start increasing rates by about 25 bps in the second quarter, followed by three more 25-bp increases in the third and fourth quarters of 2022.

The BSP expects inflation to exceed the 2-4% target of 4.3% for 2022.

The Monetary Board has kept its key policy rate at a record low of 2% since November 2020 to support economic recovery.

BSP Governor Benjamin E. Diokno said last month that they might consider a rate hike before June, when more data on economic growth and employment will be available to prove the recovery is more entrenched.

The Monetary Board will have its next policy review on 19 May.