Fed hike unlikely to spur aggressive BSP response
The Bangko Sentral ng Pilipinas is expected to take a measured approach to raising interest rates despite the US Federal Reserve’s (Fed) first increase since 2023, analysts said, as a more aggressive tightening campaign could unsettle markets and add to financial volatility.
Leonardo Lanzona, an economist at Ateneo de Manila University, said the BSP still has a positive policy-rate differential with the Fed, giving local policymakers room to avoid an outsized or off-cycle rate increase just to match the Fed.
That said, Lanzona expects the central bank to raise its benchmark rate by another quarter of a percentage point at its October meeting. “An emergency hike would look more like panic than strategy when the central bank still has room to be deliberate,” he argued.
More pressure for peso
While most of Asia was asleep, the Fed on Wednesday in Washington raised its benchmark interest rate by 25 basis points to a range of 3.75 percent to 4 percent. The increase marked the first rate hike under Chair Kevin Warsh, as the US central bank seeks to bring inflation back under control.
The increase was widely expected by markets, but it came after a period of intense volatility. Ahead of the Fed’s announcement, the 10-year US Treasury yields soared above 5 percent, battering emerging-market currencies.
The peso—already under pressure from elevated oil prices—weakened toward 63 to the dollar as expectations of higher US yields increased the appeal of dollar-denominated assets. That came even as the BSP has raised its benchmark rate by a cumulative 75 basis points since April to 5 percent, in an effort to contain inflation that has exceeded the official 3-percent target.
Lanzona said a positive rate differential alone would not be enough to fully support the peso.
“It isn’t sufficient because it doesn’t account for perceived risk, the expected future path of the gap, or shocks hitting both currencies at once, like the current oil-driven inflation from the Gulf conflict,” he said.
Diwa Guinigundo, an economist at New York-based GlobalSource Partners and a former central bank deputy governor, said the Fed’s move would clearly alter the external financial environment for the Philippines, but the BSP would not necessarily need to match every Fed move.
“The BSP has to respond primarily to domestic inflation and inflation expectations, while taking account of the peso and external financial conditions,” Guinigundo said, adding that the peso could remain under pressure.
“The important point for the BSP is that it should not try to defend a particular peso level mechanically,” he said. “Monetary policy should remain focused on price stability, but the exchange rate cannot be ignored.”
Equities vs bonds
The prospect of higher financing costs has also rattled equity markets, as rising bond yields could make fixed-income assets like bonds more attractive relative to stocks. Ron Acoba, chief investment strategist at Trading Edge, said the Philippine stock market could see wider foreign outflows.
“With the Fed signaling further tightening and elevated oil prices adding to inflation risks, yields could remain higher for longer, suggesting that these headwinds for Philippine equities may persist,” Acoba said.
Toby Allan Arce, head of sales trading at Globalinks Securities and Stocks Inc., said property companies and real estate investment trusts could be among the sectors facing greater pressure in a high-yield environment. Capital-intensive sectors such as utilities, infrastructure and telecommunications could also face valuation pressure, he said.
Banks could be relatively better positioned, particularly those with strong deposit franchises, Arce added. “If yields remain higher for longer, I would expect the impact across the Philippine stock market to be uneven,” he said.
