The Bangko Sentral ng Pilipinas (BSP) is among a small group of Asian central banks still maintaining some interest rate differential with the US Federal Reserve (Fed) , as policymakers move to contain inflation and support a weakening currency, Bank of America (BofA) said.
The Philippines, Indonesia and India are the only major Asian economies that have maintained a positive policy-rate differential with the United States, even as the Federal Reserve has narrowed its gap with central banks across the region, BofA said in a note to clients on Wednesday.
The shift marks a reversal from much of the past 15 years, when Asian emerging-market central banks generally maintained higher policy rates than the Fed. That changed during the Fed’s aggressive rate-hiking cycle in 2022 and 2023, when central banks across Asia largely followed suit to limit pressure on their currencies.
The United States has retained a yield advantage over much of Asia even after the Fed began cutting rates, as inflation has remained stubbornly above its target. That advantage continues to weigh on Asian currencies, BofA said.
The Philippines, however, is among the countries moving ahead of the Fed as policymakers seek to shore up their currencies against pressure from higher oil prices and current-account deficits, the bank said.
The peso has since recovered since nearly falling to the 62-per-dollar level last week.
‘India, Indonesia and Philippines managed to hike their rates enough to stay above Fed’s, suppressing capital outflows and depreciation pressure on their currencies,’ BofA said.
‘Notably, only these three countries in our universe, currently enjoy a policy rate advantage over US. On the other hand, Thailand and China have widest negative spreads with the US relative to narrower differentials of Malaysia and Korea,’ it added.
Since April, the BSP has raised its policy rate by a total of 50 basis points to 4.75 percent as it seeks to tame an inflation flare-up tied to the Middle East conflict.
Data showed consumer prices rose 6.2 percent year-on-year in July, easing from the prior month’s pace of 6.4 percent but still above the official target of 3 percent.
An Inquirer poll of 15 economists showed 11 expect the Monetary Board to deliver a quarter-point rate hike at its meeting today. The remaining four forecast the benchmark rate to be unchanged.
In its note, BofA said the BSP may hike the key rate by another 25 basis points today, which could mark the central bank’s last tightening move under its current anti-inflation campaign after economic growth moderated to a new postpandemic low in the second quarter.
‘Markets are pricing higher for longer Fed policy path or high real rates rather than a major resurgence in long-term inflation in the US,’ BofA said
‘This demands Asian central banks to be selective in hiking or be in a wait-and-watch mode as they continue to be exposed to risks from oil price swings, El-Niño related shocks, hawkish Fed and a likely broad-based US dollar strength,’ it added.