Economy

BSP may hike rates further as Fed maintains hawkish stance













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BANK of the Philippine Islands (BPI) expects the Bangko Sentral ng Pilipinas (BSP) to hike borrowing costs by at least one more time this year to keep a healthy rate differential with the US Federal Reserve, even as inflation is expected to slow further.

“Despite the current outlook for inflation, it might be premature to conclude that the hiking cycle is over. One or two more rate hikes are still possible for the rest of the year depending on how the FX (foreign exchange) market will react in case the Fed hikes again,” BPI said in a statement on Thursday.

“So far, the differential between US and Philippine policy rates is 100 bps (basis points). This can narrow further to 50 bps if the BSP doesn’t hike. The BSP may hike again if the FX market becomes volatile given the narrower interest rate differential,” it added.

Following the slower June consumer price index (CPI) print, BPI said it expects inflation to return to the BSP’s 2-4% target by September or October “if conditions remain favorable.”

“With the global economy still struggling from weak demand, stable commodity prices should continue to pull inflation back to target. However, we also see upside risks that could prevent inflation from declining faster. The most significant risk is food security especially given the looming El Niño,” it said.

Headline inflation slowed to 5.4% in June from 6.1% in May 2023 and June 2022. Still, it marked the 15th straight month that the CPI exceeded the BSP’s 2-4% target for the year.

For the first six months, inflation averaged at 7.2%, still higher than the central bank’s 5.4% forecast for 2023.

The BSP kept its policy rate at 6.25% at its last two meetings in May and June and signaled an extended pause as inflation continues to ease.

Meanwhile, the Fed last month paused its tightening cycle after hiking rates for 10 straight meetings by a total of 500 bps to a range between 5% and 5.25%.

Fed Chair Jerome H. Powell has said one or two more 25-bp hikes are possible within the year as stronger-than-expected economic data support further tightening.

With the Fed staying hawkish, rate cuts from the BSP may be out of the question in the near term, BPI said.

“It’s even more premature to expect rate cuts this year given the conditions abroad. With the Fed still keeping its hawkish stance, it might be difficult to cut rates while minimizing the impact on the currency,” the lender said.

“Refraining from cutting interest rates immediately and too aggressively will also allow the BSP to build up its foreign reserves… A weaker external position may also prevent the BSP from cutting rates immediately since it has less buffers to address the volatility that a narrower interest rate differential could bring,” BPI added.

TRANSFER FEE WAIVEDMeanwhile, the Ayala-led bank on Thursday said in a separate statement that it will waive the fee for interbank fund transfers of up to P1,000 made via its mobile app until Sept. 30.

“We encourage our clients to take advantage of the new BPI app and transfer up to P1,000 via InstaPay for free to fully enjoy and maximize the benefits of digital bankings,” BPI Consumer Platforms Head Fitzgerald S. Chee said.

Neil




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