‘Reserves helped PHL deal with U.S. rate hike’


THE Philippines was able to withstand the increases in US policy rates due to its large reserves, according to the Bangko Sentral ng Pilipinas (BSP).

In a briefing at the World Bank-International Monetary Fund (IMF) Spring Meetings, BSP Governor Felipe M. Medalla said having large reserves allowed the central bank to intervene in the foreign exchange market to prevent the peso from depreciating significantly against the US dollar.

Medalla said any actions of the US in terms of monetary policy, including quantitative easing which was implemented by the Federal Reserve in 2013, will affect the Philippines and the world because of its position as the center of the global financial system.

“We wish that the US will be more caring about international conditions. When they change policy rates—by the way we had the opposite problem when it did QE—the peso was threatening to cross 40 and become 35 and we were told a lot of firms that engage in tradeables may go bankrupt or they have to layoff [workers], so we had to intervene heavily,” Medalla said.

“So, the lesson is accept that the international financial system will be driven largely by US domestic concerns and be ready for it. And the lesson is to have large reserves,” he stressed.

During the briefing, Medalla was asked whether the BSP would take a different tack in terms of its response to the Federal Reserve’s recent policy actions if it knew inflation would be as sticky as it is.

Sticky inflation, Medalla said, is the economy being tag-teamed by different shocks one after the other. This leads to high headline inflation which was at 7.6 percent, and core inflation at 8 percent in March.

For the Philippines, Medalla said the shocks that affected the economy included the Russia-Ukraine war which increased oil prices and was followed by supply shocks that sent sugar, vegetable and fruit prices soaring as well as diseases that kept meat prices elevated.

“Clearly, when you have high inflation because of all the supply shocks, these eventually travel to the service sectors because if food is expensive, you have to pay higher wages; if fuel is expensive, you have to pay higher wages.” So Medalla added, “with the six-month lag in the service sector inflation went up. Now we decided to use all our possible weapons.”

Apart from raising policy rates by 425 basis points, Medalla said the BSP intervened in the foreign exchange market as well as bought a lot of government securities to prevent bond prices from declining significantly.

Medalla said these have worked, as the peso is back to the P55 to the dollar level from P58; and the two recent inflation prints—February and March—were encouraging as the trend is now downward.

The BSP Governor also expressed confidence that the strong balance sheets of banks will allow the Philippines to ride out the banking crisis.

He added that the Philippines also had advantages such as lower bond tenors at 5 to 10 year bonds as opposed to the tenors in the US which could reach 30 years. Medalla said there were bank losses because of this, but these were smaller than those in the US.

“If you use all your weapons, your primary weapon for inflation can be used to their full potential and the primary weapon is still interest rates, but this must be supported by good prudential regulation. And buffers and buffers because foreign exchange markets go crazy,” Medalla said.

“And then the currency share of the world is driven by what happens to Iowa and in very domestic concerns, clearly the policy rates in the US, they don’t care what happens to the world in general and the very target rapidly, you have to be ready therefore having buffers is very important,” he added.

Earlier, Medalla said the BSP may start reducing key policy rates if the negative month-on-month growth trend in inflation would be sustained longer.

In an interview with Bloomberg on the sidelines of the World Bank-IMF Spring meetings in Washington, BSP Governor Felipe M. Medalla said cutting key policy rates would require more than just “one observation point.”

Medalla said during the interview that if the April inflation print follows the decline in prices observed in March, there could be room for a pause in raising rates but not enough to consider reducing policy rates.

In terms of lowering the reserve requirement ratio (RRR) by June, Medalla said this can only happen if the BSP introduces a pause in key policy rates to avoid market confusion.

Raising interest rates would lead to monetary tightening and limiting the money supply. However, lowering the RRR would encourage banks to extend more loans thereby increasing money supply.