PH monetary policy to remain ‘accommodative,’ says Medalla

The Philippines is likely to remain in negative real interest rate territory—a situation where the interest rate is lower than the inflation rate—for at least a year or two more as challenging economics call for a “fairly accommodative” monetary policy.

This is according to economist Felipe Medalla, a member of the Bangko Sentral ng Pilipinas’ (BSP) policy-making Monetary Board, citing his personal views during a Management Association of the Philippines (MAP) roundtable on Tuesday.

This year, Medalla said the Philippines could easily grow its gross domestic product (GDP) by at least 7 percent but noted this was “nothing to crow about” given the very low base in 2020, the year when the COVID-19 pandemic bludgeoned the global economy.

“It’s only in late 2022 where we will have some catching up assuming some normalization of growth,” Medalla said, noting however that it’s difficult to forecast the growth trajectory beyond 2021 given a lot of uncertainties arising from the COVID-19 virus, alongside the forthcoming presidential elections in 2022.

On the COVID-19 virus, he cited uncertainties on the new variants as well as risks that not enough people may agree to be vaccinated.

“It’s very hard to say what will happen in 2022. What we assure you is we have a lot of space in the BSP for fairly accommodative monetary policy,” Medalla said.

“Right now the only debate is whether we cut or we don’t cut, but raising [key interest rate] is not in the picture at all,” he said.

After an aggressive monetary easing last year, the BSP’s overnight borrowing rate is now at a record low 2 percent. On the other hand, the inflation rate breached the 4 percent upper end of the BSP’s target in January, hitting 4.2 percent year-on-year from 3.5 percent due to supply-side shocks caused by recent typhoons and the pork crisis caused by the African swine flu.

“One can justify one or two more cuts but one can also easily justify—depending on one’s arguments—[that we] be happy with the current [interest rate],” Medalla said.

With the current rates, even if inflation returns to normal or around 3 percent, he noted that the country would still be in negative interest rate territory in real terms.

However, Medalla said he believed that the monetary authority should be supportive of the fiscal sector.

“The last thing we want is to have a very gun-shy fiscal authority because they think monetary policy will be tightened and you will end up, when their loans mature, with costly refinancing,” Medalla said. —Doris Dumlao-Abadilla INQ