MANILA, Philippines — Local equities ended flat while the peso gathered some strength against the US dollar on Thursday as the Bangko Sentral ng Pilipinas unleashed a surprise rate hike of large magnitude to tame inflation and stave off the local currency’s decline.
The Philippine Stock Exchange index (PSEi) was shedding over 1% in the morning trade, before paring those losses and finishing at 6,248.13, down by just 0.12%.
The broader All Shares market also stumbled but finished with minimal losses of 0.22%. Most sub-indices were in the red except for financials and mining & oil counters, which both eked out gains.
Meanwhile, the peso took the BSP’s hawkish stance to heart as it finished at P56.15 against the greenback, firmer than the previous day’s close of P56.26. The local unit nearly hit its all-time low on Tuesday, after government data showed a widening trade deficit and amid traders’ concern on the country’s monetary policy settings.
The BSP’s curveball hit, adjusting its key policy rate before scheduled meetings, proved more than necessary as central banks all over the world stirred to action in a bid to curb boiling inflation.
Commenting on the local bourse’s performance, Luis Limlingan, head of sales at local brokerage Regina Capital, noted investors were increasingly fearful of a recession in the United States, partly as prices within the world’s largest economy continues to soar.
“Philippine shares managed to finish almost flat, following a surprise move of the BSP to tame inflation, as key policy rates increased 75bp to 3.25%. For a substantial part of trading, the PSEi was down more than 1% as analysts became worried about the impact of a US recession,” he said in a Viber message.
Michael Enriquez, chief investment officer at Sun Life Investment Management and Trust Corp., called the PSEI’s reaction “muted” in light of the BSP’s aggressive rate hike.
“Even the Philippine peso didn’t really appreciate significantly. It would be good for the BSP to better telegraph their succeeding moves,” Enriquez said in a Viber message.
The BSP said later in the day that an August rate-setting meeting is still in the books, despite the Monetary Board’s decision today.
For Domini Velasquez, chief economist at China Banking Corp., the BSP has another rate hike in the chamber.
“We think that another 25bp rate hike in its August meeting is warranted to demonstrate that it has a firm hand on inflationary expectations and financial markets volatility,” she said in a Viber message.
Francisco Dakila, deputy BSP governor, noted in Thursday’s briefing that second-quarter economic growth could land in the upper range of government growth estimates of 6.5-7.5% this year. GDP growth landed at 8.3% in the first three months of the year, as the domestic economy beat back an Omicron variant surge at the start of the year.
The BSP likewise noted that it intends to follow-through on former central bank governor Benjamin Diokno’s intent to cut the reserve requirement ratio to single digits. Trimming the RRR would give banks more money to lend and reduce the cash holdings that they keep in their vaults as standby funds that do not generate returns.
If this happens, the RRR reduction would likely work in tandem with the BSP’s rate hikes, which have the opposite effect of tightening money supply.
“Since June, the Philippine peso has depreciated markedly (by 7.2% since the start of June to yesterday) in what markets perceive as a dovish BSP amidst a higher interest rate environment,” Velasquez said.
“The recent move will likely prevent further speculation, prop up the peso, and calm markets,” she added.