Moderate hikes favor APAC banks

Moderate monetary policy tightening benefits Asia-Pacific banks, including Philippine lenders, and will generally support bank credit profiles in the region “to the extent that higher interest rates lift net interest margins (NIM),” credit watchdog Fitch Ratings said.

According to Fitch, the central bank’s decision to “mildly” raise interest rates would favor local banks in the Philippines and the Asia-Pacific in terms of fueling revenue gains.

“We do not expect significant deterioration in asset quality in any APAC banking sector, though there may be pockets of vulnerability. This partly reflects our expectations for relatively moderate tightening across APAC, where inflation pressure is generally more subdued than in other regions,” Fitch said in a report.

It went on to say: “Securities portfolio losses should also be manageable, but banks in Hong Kong, India, Indonesia, Malaysia and Taiwan have the largest securities portfolios and are the most sensitive to yields.”

The Bangko Sentral ng Pilipinas’ (BSP) policy-making Monetary Board (MB) has increased the central bank’s key rates by a total of 125 basis points to date or 25 basis points last May, 25 basis points last June and a surprise 75 basis points in its 14 July meeting.

The recent rate hike was made off-cycle or not during a policy-rate meeting after the US reported further acceleration of its inflation rate in June to 9.1 percent, which is seen to further weaken the Philippine peso, among others.

BSP Governor Felipe Medalla said the Monetary Board could again announce a 50 basis point increase in the bank’s key rates in August to help address the accelerating inflation rate and the Federal Reserve’s rate hikes.

“There are pros and cons to gradualism” on the possible rate increases in the coming months, but noted that “if the inflation is too high, even if the causes are impervious to BSP’s kit of policy instruments, a monetary policy response may be necessary,” Medalla said.

Close watch for Hawkish stance

Monetary authorities are closely monitoring the developments in the financial markets, specifically the hawkish stance of the US Federal Reserves, following the 150 basis points increase in its key rates since last March, which is, in turn, targeted to address the 40-year high consumer price index in the US, he added.

He said these rate hikes have resulted in, among others, the depreciation of currencies worldwide, including the peso.

He said there is a need to address the weakening of the local currency because “if such pressures are left unchecked, these could add to the already high domestic inflationary pressures.”

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