MANILA -The Bangko Sentral ng Pilipinas (BSP) has leeway for a further monetary policy tightening amid continued upward price pressures on goods and services, even as market forecasters think that interest rates may be kept unchanged until early next year.
BSP Governor Eli Remolona Jr. said in an interview with CNBC on Friday that the current situation may be rightly described as a “hawkish pause.”
“We go where the data leads us, but the data seem to be going in two different directions,” he said. “I think a pause is prudent but we’re ready to hike [the policy rate] if the upside risks [to inflation] materialize.”
When the Monetary Board (MB) announced on Aug. 17 their decision to keep the BSP’s benchmark overnight borrowing rate at 6.25 percent for the third consecutive policy meeting, they took note of potential price pressures that are related to the impact of possible higher transport charges; minimum wage increases; persistent supply constraints on key food items; and the effects of El Niño weather conditions on food prices and power rates.
Policy rate
The BSP uses its overnight borrowing rate to control the amount of liquidity in the local financial system. Higher interest rates have the effect of reining in inflation—the central bank’s primary goal—but also caps economic growth, while lower rates have the inverse effect.
On Friday, Remolona said they expect a recovery in the growth of Philippine gross domestic product (GDP) in the third quarter after a disappointing 4.3 percent in the second quarter.
Considering this, the BSP chief said it was feasible to resume policy tightening without dampening GDP growth.
Highest in region
At 6.25 percent, the BSP policy rate is currently one of the highest in the Asia-Pacific region, following an aggressive tightening run that saw 4.25 percentage points of cumulative hike between May 2022 and March 2023.
“Something we call the neutral or the natural rate of interest is closer to 4 percent in real terms, and if our projections are right, we will be at 3.25 percent, Remolona said. “In real terms with a neutral interest rate so we have room to hike.”
Nalin Chutchotitham, Citi group’s economist for the Philippines, said in a research note they continue to expect no change in the policy rate through early 2024.
Nalin observed that Remolona’s words after the policy meeting on Thursday suggested that the MB deemed that the policy rate is still “low enough” to be of no restraint to GDP growth.
“We also note the BSP’s comment today that the bulk of the impact of past monetary tightening would be felt in 2024,” Nalin said. “We think the BSP also has the option of delaying its future rate cuts, instead of hiking more, to anchor future inflation expectations.”
BMI Country Risk & Industry Research, a unit of Fitch Solutions Group, opines that the BSP will likely keep financial conditions “very restrictive” for a while longer, adding that it feeds into its expectations for rate cuts to materialize only in the second quarter of 2024.
Aside from addressing inflation, BMI thinks that maintaining the stability of the Philippine peso will be a key consideration in the BSP’s policy decisions in the near term.