Significance of Fed action
Medalla said the direction of the central bank’s monetary policy is affected by moves from the U.S. Federal Reserve.
“The Fed is the central bank of the world. And we as small open economies will always have to look at the effects of their actions, especially on our exchange rate,” he said.
The Fed raised its benchmark rate by 0.75 basis point in both June and July — the largest back-to-back increases since the central bank started using the funds rate as its chief monetary policy tool in the early 1990s.
But despite the large moves by the Fed, Medalla said the Philippine bank is unlikely to do “anything unusual” and is likely to stick to 25 basis point hikes in the coming months.
“The interest rate differential between the Philippine interest rates and U.S interest rates [has] become the key factor that drives the exchange rate,” he said.
“Now we think the interest rate differential is just more or less in the right zone … again if the Fed makes large moves, we may not have to make large changes in our policy.”
‘Acting sooner is better’
On Friday, Nomura said in a research note that the Philippine central bank’s latest 50 basis point rate hike was in line with consensus expectations as well as its own.
“BSP raised its 2022 CPI inflation forecast to 5.4%, further beyond the 2-4% target, and yet still cited upside risks,” it added.
“On the external front, BSP remained cautious, and still noted some risk of a weak currency adding to inflation expectations. We reiterate our forecast that BSP will hike by 25bp in each of the remaining meetings of the year, taking the policy rate to 4.50% by December,” Nomura said.
The central bank chief said that it is “comfortable” for now, adding that the country’s economy and the bank’s balance sheet remain strong.
“They’re all good … that’s my view, the economy can take the hikes. Actually, acting sooner is better than acting later. If inflation is higher in the future because we delayed the hikes, then the interest rate hikes will have to be larger,” Medalla said.
