Hawkish Fed Tests Philippine Central Bank Chief's Monetary Policy Signals
Date
11/5/2022 11:10:27 PM
(MENAFN- Gulf Times) In the Philippines, where monetary authorities are viewed to have been more transparent than their peers, central bank Governor Felipe Medalla is finding that words are better matched with actions.
The long-tapped tool of open mouth operations, referring to central bank communications to direct market expectations, is being challenged by the federal Reserve's aggressive tightening. The strategy that has worked in favour of Medalla's predecessors experienced in the art of verbal intervention has to now be accompanied by bold measures.
The 72-year-old long-time economics professor presided over an out-of-schedule rate hike in July, barely two weeks into the job, reacting to US data showing quicker inflation. On November 3, he announced that Bangko Sentral ng Pilipinas will match the Fed's 75-basis-point hike two weeks later.
“Markets will want actions,” said Trinh Nguyen, a senior economist at Natixis SA in Hong Kong. The announcement“signals it will be hawkish but it can also easily do an off-schedule hike rather just announcing what it will do but not yet do.”
BSP is open to matching the Fed's next rate increase, Medalla told Bloomberg Television on November 4, after latest data showed domestic inflation is near a 14-year high.
“Maybe that's the bigger goal here: To not add to an already uncertain environment,” said Euben Paracuelles, an economist at Nomura Holdings Inc. in Singapore, when asked to comment on Medalla's recent rate guidance.
Medalla, a member of BSP's monetary board from 2011 before becoming governor in July, takes his cue from his predecessors.
Finance Secretary Benjamin Diokno, who Medalla replaced as BSP chief, had also telegraphed rate moves. Amando Tetangco, who was governor from 2005 to 2017, was widely regarded to have mastered the art of influencing market behaviour with his words rather than direct intervention.
Communication has emerged as a key tool for central banks as markets became increasingly volatile. Thailand has turned to social media to shed light on its rate moves, while Indonesia flags when it's propping up the rupiah. Still, few are as open and transparent as BSP.
“The nice thing about having credibility is when the central bank issues statements, markets take it seriously,” Medalla told Bloomberg Television on November 4.“But we also know that the market responds to a lot more things than what the BSP is doing.”
That they do. Because while the Philippines has implemented its most aggressive tightening in two decades and carried out much steeper rate increases than its peers, the peso remains one of the region's worst performers this year.
Raising rates by 75 basis points this month would bring BSP's total increases to 3 percentage points this year.
More rate hikes are expected from the Philippines. Michael Ricafort, an economist at Rizal Commercial Banking Corp. in Manila, said the benchmark rate may reach 6%. Natixis's Nguyen forecasts the key rate to rise to 5.5% by year end.
Guidance from the BSP promotes“greater certainty” and creates a“more conducive” environment for businesses and consumers, said Ricafort.
Medalla, like his forerunners Diokno and the late Nestor Espenilla, has a chat group with his press corps where every now and then he shares views on policy and the economy.
During public speeches and interviews, Medalla has hinted at how political pressure complicates central bank's operations.
“Our general rule is the more predictable we are, the better,” Medalla told Bloomberg TV when asked about the importance of being transparent.
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