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Salceda backs BSP’s surprise rate hike as defense against higher-than-expected US inflation levels

July 14th, 2022

House Ways and Means Chair Joey Sarte Salceda (Albay, 2nd district), whose committee oversees monetary policy on Congress’s behalf, has defended the Bangko Sentral ng Pilipinas (BSP) decision to hike interest rates by 75 basis points, saying that the move is a “preemptive defensive action against inevitable rate hikes by the US Federal Reserve, which, once effected, will weaken the Philippine currency at beyond levels considered beneficial, with implications on the prices of imports, our currency reserves, and foreign debt.”

“Once the Fed raises rates and we did nothing, the peso will get even weaker,” Salceda said.

“This is the best option for the BSP short of actually defending the peso in open market operations. We shouldn’t defend the peso by buying more of it with foreign currency reserves. But we can’t do nothing about the inflationary impacts of an expected Fed rate hike as a result of higher-than-expected US inflation. So, the rate hike was one of few viable options,” Salceda said.

“I remain very skeptical that direct support for the peso will work. And it’s probably bad for us since it will have us lose our foreign currency reserves rather than earn them. And if it doesn’t work, which I doubt it will, we will lose both foreign reserves and foreign direct investments. So, direct currency support is a terrible idea to do at this point.”

“On the other hand, if we did nothing, imports will get more expensive, and our foreign debt will require more pesos to amortize. So, the BSP did what it could.”

“If we bought more pesos instead of a rate hike, that would cost us more, since we will be buying the peso with foreign reserves at the local currency’s highs. And there is guarantee that the move will work, since the cause of peso depreciation versus the dollar is external.”

As a result of the rate hike, Salceda said he expected slower lending growth. 

Salceda however, says that the impacts of the rate hike on growth in the real economy can be mitigated with President Marcos’s focus on agriculture and small businesses which, Salceda adds, are underleveraged and will not likely be severely affected by slower lending.

“Our small businesses don’t borrow. Only around 4.8% of MSMEs have loans with banks. So, due to a very low lending base, I don’t expect slower lending to hamper MSME operations substantially. Agriculture accounts for just around 6% of bank loans, so we will also not see much constraints due to slower lending there,”

“What you will see affected is the residential property sector, and maybe, to some extent, the automobile market, because these sectors are highly dependent on easy credit terms. If banks are less reluctant to lend, we will see some demand slowdown there,”

“But I think gains due to a more permissive COVID-19 regime will more than make-up for the losses due to slowdown in credit. So, overall, I think these sectors will still be in the green this year.”

“All in all, I think the BSP did the right thing by making this decision early and big enough. It demonstrates the credibility of our monetary authorities, and that we have our hands to the ball.”

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