Economist says BSP rate hikes favor Peso

“The move also support(s) PHP which has contributed to rising inflation. We support BSP’s view that the economy can absorb monetary tightening,” Joey Cuyegkeng said. (Photo: Bangko Sentral ng Pilipinas/ Facebook)

MANILA — An economist of ING Bank Manila believes the additional hike in Bangko Sentral ng Pilipinas’ (BSP) key rates effective August 10, would help buoy the Peso and address the impact of its weakness on domestic inflation.

On Thursday, the BSP’s policy-making Monetary Board (MB) hiked the central bank’s key rates by 50 basis points on expectations of elevated inflation rate levels until next year. The rate increase this week is on top of the 25 basis points hike each last May and June.

“The move also support(s) PHP which has contributed to rising inflation. We support BSP’s view that the economy can absorb monetary tightening,” Joey Cuyegkeng said.

The Peso is currently trading at the 53-level to the greenback and some economists consider this to be another factor for the sustained rise of the rate of price increases.

As of last July, inflation averaged at 4.5 percent, higher than the government’s 2 percent to 4 percent target until 2020.

Last July alone, inflation surged to a multiyear high of 5.7 percent from month-ago’s 5.2 percent due to faster inflation of the food and non-alcoholic beverages index.

Authorities have traced the sustained rise of this particular index to tighter supply of fish and rice, among others.

Cuyegkeng also noted that with domestic demand remaining robust, imports have shadowed exports, resulting in trade imbalance and affecting the overall growth of the domestic economy.

In the second quarter of the year, growth, as measured by the gross domestic product (GDP), stood at 6 percent, slower than quarter ago’s 6.6 percent, which authorities pointed to the weak output of the agriculture sector, among others.

“The aggressive BSP policy tightening not only addresses BSP’s mandate to moderate inflation but also moderate the imbalance generated by private sector growth and enhanced government spending,” Cuyegkeng said.

“We believe that this is not the end of BSP’s tightening as the immediate objective to anchor inflation expectations would need further action since inflation has yet to peak and would remain elevated for the rest of the year and early 2019,” he added.