A week after tamping down calls for more aggressive action on policy rates, Rep. Joey Sarte Salceda said that the decision of the Bangko Sentral ng Pilipinas (BSP) to hike interest rates by 75 basis points last Thursday is the “best option” for the central bank.
Salceda, who chairs the committee overseeing monetary policy on Congress’s behalf, said the inevitable rate hikes by the US Federal Reserve, and 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.”
“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,” Salceda said. “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.”
Last week, the lawmaker pointed to first-quarter broad money data as an admonition to those calling for monetary authorities to adopt a more hawkish stance on inflation.
“The decision of the central bank on whether to increase rate hikes should be predicated on just two things: whether the country’s inflation is caused by excess liquidity in the Philippine markets and whether the rate hike relates to the causes of inflation in the Philippines. For now, the answer is largely no,” Salceda said in a statement released last July 3. “So we should not self-inflict a pain that is, in all likelihood, going to be futile for addressing price concerns.”
Defending the peso
THAT day, Salceda explained that year-on-year, the first-quarter broad money—a tool that measures the amount of money circulating in the economy—only expanded by 7.7 percent, while gross domestic product (GDP) expanded by 8.3 percent.
That means, the economist-lawmaker said in his July 3 statement, “the real economy, for now at least, is still growing faster” than money supply.
Salceda recalled that during his time as an investment banker, he “sparred with some officials of the BSP on the central bank’s actions to support the peso during the years that immediately presaged the Asian financial crisis.”
A week later, Salceda maintains he “remains 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,” he said last Thursday.
Salceda added that “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.”
As a result of the rate hike, Salceda said he expects slower lending growth.
Residential, auto sectors
NONETHELESS, Salceda said the impact of the rate hike on growth in the real economy can be mitigated with the Marcos administration’s focus on agriculture and small businesses which, he says, are underleveraged. These real sectors, Salceda added, will not likely be severely affected by slower lending.
“Our small businesses don’t borrow. Only around 4.8 percent of MSMEs [micro-scale, small-scale and medium-scale enterprises] have loans with banks,” he said.
Hence, due to a very low lending base, Salceda said he doesn’t expect “slower lending to hamper MSME operations substantially.”
“Agriculture accounts for just around 6 percent of bank loans, so we will also not see much constraints due to slower lending there.”
According to Salceda, the residential property sector and the automobile market will be affected by the recent BSP decision as these sectors are highly dependent on easy credit terms. “If banks are less reluctant to lend, we will see some demand slowdown there.”
Nonetheless, Salceda said, he believes the “gains due to a more permissive Covid-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,” he added. “It demonstrates the credibility of our monetary authorities, and that we have our hands to the ball.”