[Vantage Point] Fed rate hike rattles PH economy

“The Federal rate hike is a form of American Imperialism.” I overheard this claim from a group of men seated a table away from me in a Makati restaurant. Obviously supporters of incoming president Ferdinand Marcos Jr., they took turns in “analyzing” this recent action of the United States, with one of them boldly positing that the move is the US way of pressuring Marcos Jr. for the country to shift allegiance from China to the US, “undoing Digong’s [former President Rodrigo Duterte’s] masterful foreign affairs policy.”

Outrageous as it may seem, I wouldn’t be surprised if this argument will be taken hook-line-and-sinker by many people – what with the way information has been bent over and over to serve vested interests. Falsity, sad to say, has become the norm in this day and age.

Of course the Philippines was not at all in the US fiscal planners’ mind when they decided to increase benchmark interest rate by three-quarters of a percentage point, the highest in 28 years. They did so to quickly ease liquidity in the US financial markets to curb mounting inflation.

Liquidity is how fast an asset or security can be bought or sold in the market and converted to cash. Reining in liquidity is the US Federal Reserves’ topmost concern as inflation seethes (soaring consumer prices) to 8.6% in May, the highest in 40 years! There is a growing concern in US business about whether Fed Chair Jerome Powell will continue to raise rates, how fast he will do so, and if such move will slick into a recession.

“Inflation is still raging out of control and hasn’t shown any consistent signs of easing up, so the Fed will need to be even more aggressive than was thought just a week ago,” says Greg McBride, CFA, Bankrate chief financial analyst.

To battle inflation, the Fed’s main tool is setting the short-term borrowing rate for commercial banks, which those banks then pass on to consumers and businesses. A higher rate influences the interest you pay on everything – from credit cards to mortgages to car loans – making borrowing more expensive. On the flip side, it also boosts rates on savings accounts. How do higher interest rates reel in inflation? They help by slowing down the economy.

Under normal circumstances, a free market economy like the US would rather let the market correct itself. But inflation has become worrisome that the Fed has to intervene. It is is a bitter pill, but a necessary cure to cool down an overheated economy. Spiraling consumer prices echoes not only rising costs for gasoline and groceries, but also for rent and airfares and a wide range of services. “The Fed uses interest rates as either a gas pedal or a brake on the economy when needed,” said Greg McBride, chief financial analyst at Bankrate. “With inflation running high, they can raise interest rates and use that to pump the brakes on the economy in an effort to get inflation under control.”  

Unfortunately for the Philippines, the Fed’s action will affect our economy, not by design as imagined by those men in the restaurant. Our country relies on our trading partners for economic sustenance, so we had always been on the short end of the stick when something goes awry overseas. As they say, when the US sneezes, the Philippines catches the cold.

US-based hedge fund manager Eric Jurado told Rappler that the Fed hike will cause peso depreciation. “This means that we would need more pesos to pay off our dollar denominated debts,” he explained, “which, as of March this year, stood at $109 billion.”

Jurado said that imports will be more expensive because of higher prices and a more expensive dollar. Exports, on the other hand, will slow down because of less demand from US consumers.

Especially during the two-year COVID-19 lockdown, when people had to stay home, Jurado said, the Fed had to flood the economy with money to help consumers and businesses, causing so much money chasing fewer available goods, services, and assets.

“There’s so much pent-up demand now that goods couldn’t keep up, which increased prices across the board. The Fed needed to increase rates and decrease the money supply to slow the economy to maintain price stability and allow the economy to catch up.“ Jurado added the dollar became more expensive due to the increased Fed rates, with demand rising and higher yields making US government bonds more desirable.

The local currency now hovers at P54 against the greenback, a level not seen in 16 years.

In response, the Bangko Sentral ng Pilipinas (BSP) increased its policy rate by another 25 basis points on Thursday, preceded by a hike of the same scale last May, with the Monetary Board’s latest decision bringing the benchmark rate to 2.50%. The decision disregarded calls for a much bigger increase, to be in tune with the world’s central banks in taming the skyrocketing inflation. Incoming BSP Governor Felipe Medalla explained the BSP would take a more gradual approach “to avoid hurting the economy too much.”

A weak currency could exacerbate the expensive import cost for the Philippines, which is already wrestling with high oil prices due to the ongoing Russia-Ukraine war. The war has already caused gas pump prices to jump at around P85 per liter for both diesel and gasoline and experts fear that it could go to as high as P100 per liter.

The incoming economic team of the Marcos administration has to address major concerns which the Filipino people are hurting from the most and which the Fed hike has rubbed salt on. Private and public motorists are already inconvenienced by consecutive gas pump price. Now comes a forecast by Nomura Holdings Inc. that food prices will likely heat up further down the road, with Singapore, South Korea, and the Philippines set to see the sharpest price increases.

Except in Japan, food prices in other Asian countries rose 5.9% annually in May, from 2.7% in December, Nomura said in a report Monday. Given the roughly six-month lag between the movement of global food costs and their impacts in Asia, that rate is expected to accelerate in the second half of the year amid Issues like China’s pandemic lockdowns, Thailand’s swine fever outbreak, and India’s heat wave adding to these woes.

According to Nomura, “Consumers’ perception of inflation is strongly influenced by the prices of frequently purchased necessities, such as food, and can lead to higher inflation expectations,” adding that Jakarta and Manila have already had to raise minimum wage levels to account for the higher cost of living. Consumer of cereals, edible oils, meats, and processed foods are already feeling the pinch of inflation. If demand surges due to nations seeking alternatives to pricey wheat, the price of rice, which has so far been kept stable by ample stocks, may be next, the report said.  

Filipinos reveling in the joy of dining out due to the lowering of COVID restrictions to Level 1, may have to consider going out less, not because of heightened health restrictions, but because inflationary prices might empty their wallets faster. – Rappler.com