BSP to raise interest rates along with the Fed

Monetary authorities will raise key interest rates further if the US Federal Reserve continues to tighten its policy, Bangko Sentral Chairman NG Pilipinas (BSP) said on Friday.

If the Fed did 50 [basis points], we can’t have zero right? The question is whether it is 25 or 50, central bank governor Felipe Medalla told Reuters in an interview.

If you have a script [where] The Fed won’t go any higher then I can absolutely tell you, neither do we.”

The BSP Bank’s Monetary Policy Board on Thursday raised key interest rates by 75 basis points, in line with the Fed’s three-quarters of a percentage point increase earlier this month.

He noted that inflation, which hit a 14-year high of 7.7 percent in October, is likely to pick up, and added that the move was also intended to support the peso.

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Analysts expect the Fed to raise rates less in December after four consecutive 75 basis point hikes, but they also see a prolonged tightening period.

The Federal Reserve next meets on December 13-14, while the Monetary Board holds its last meeting of the year on December 15.

Asked to comment on the Reuters report, Michael Ricafort, chief economist at Rizal Commercial Banking Corporation, told the Manila Times that the central bank’s plan to increase interest rates would be necessary “if inflation remains relatively high.”

“[T]It can help maintain healthy interest rate differentials and help continue to support/stabilize the peso exchange rate and general inflation.”

“There has never been a case in which the domestic policy rate … has been lower than the federal funds rate, at least in the last 20 years or even earlier, given the difference in credit ratings of the United States and the Philippines. As well as the difference in long-term inflation expectations in the two countries.”

He noted, however, that higher interest rates would lead to higher financing costs and thus lower earnings and valuations. It could also slow the economy as an unintended consequence.

“[F]Ricafort said more domestic interest rate increases may remain possible for the coming months as supported by generally strong economic data, and also “as a function of future rate hikes by the Fed as well as future behavior of the peso’s exchange rate.”

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