Medal: “There is no choice but to answer” the Fed

BANGKO Sentral ng Pilipinas (BSP) Governor Felipe Medalla. PHOTO: GERARD SEGIA

The US Federal Reserve (Fed) should be mindful of the impact of an interest rate hike on the international financial system, Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla said Tuesday in Washington.

“We want the US to be more concerned about international conditions when they change interest rates,” Medalla said during a speech hosted by the International Monetary Fund (IMF).

Emerging economies like the Philippines “had no choice but to respond to US policy,” he added, as a series of massive rate hikes put pressure on exchange rates.

“[W]When the US made a few 75s (a 75 basis point increase), it became very clear that the peso would depreciate more than is acceptable if we did not raise policy rates.”

Last October, the peso fell to a record low of 59 pesos against the dollar after aggressive tightening by the US central bank. The increase in rates, aimed at curbing inflation, also had an impact on the strengthening of the dollar.

“The peso was threatening to cross 40 to 35 and we were told that many firms could go bankrupt or we would have to quit, so we actively intervened,” Medalla said.

“So the lesson [to] recognize that the international financial system will be driven largely by US internal concerns and be prepared for that, and the lesson is to have large reserves,” he added.

The BSP Monetary Board has raised key interest rates by a total of 425 basis points since May last year in an attempt to control inflation. With consumer price growth slowing but still well above target, analysts expect another price increase in May.

Inflation has also eased in the United States and the Fed is also forecast to raise rates for the last time next month.

Medalla stressed that central banks should use all available tools to fight inflation, including interest rates, regulation and maintaining strong foreign exchange buffers.

He said the impact of the 1997 Asian financial crisis continues to affect risk-taking in Asia, which partly explains prudent management.

“Our banks are run by people who remember 1997 very well — they hate inconsistencies,” said Medalla, who is in Washington for the IMF and World Bank spring meetings and the Philippine economic briefing.

As events unfold, Chicago Fed President Austen Goolsby said Tuesday at a conference in Chicago that the US central bank should exercise caution in setting interest rate policy in the wake of the collapse of Silicon Valley Bank (SVB).

“I think we need to be careful,” he said.

“We need to collect more data and we need to be extra careful about raising rates too aggressively until we see what headwinds are doing for us in bringing down inflation.”

Goolsby is a voting member on the Fed’s rate-setting committee, which has been rapidly raising its benchmark lending rate since last year to combat years of inflation fueled by the recovery from Covid-19 and Russia’s invasion of Ukraine.

“In these moments of financial stress, the right monetary policy is really about caution, vigilance and prudence,” he said.

The Fed has raised interest rates nearly 5 percentage points since March last year, tightening monetary policy in a bid to dampen demand and slow price increases.

It continued last month with another 25 basis points gain despite financial market turmoil caused by the rapid collapse of the SVB, which took on excessive interest rate risk.

This set off a knock-on effect in financial markets on both sides of the Atlantic, leading to the collapse of another regional US bank and a pressured merger between Swiss investment banking giant Credit Suisse and regional rival UBS.

WITH REPORT FROM AFP