BSP not ruling out more hikes after Q1

MANILA, Philippines — With inflation remaining elevated until the first half of next year, the Bangko Sentral ng Pilipinas (BSP) expects the tightening cycle to extend beyond the first quarter.

In an interview with reporters, BSP Governor Felipe Medalla said he is not ruling out more interest rate hikes in the first two rate-setting meetings of the Monetary Board in 2023.

“Again, I would say we’re data-dependent. But clearly, I will not bet my life or even one week’s salary that after two meetings next year there will be no rate hikes. One cannot rule out that after two meetings, there will be no rate hikes. But again, given the nature of the surprises, one can never say never,” Medalla said.

To tame inflation and stabilize the peso, the BSP raised key policy rates by 350 basis points this year, bringing the overnight reverse repurchase rate to a 14-year high of 5.50 percent from an all-time low of two percent.

The central bank has been matching the aggressive rate hikes by the US Federal Reserve to maintain a 100-basis-point interest rate differential.

The BSP maintained its inflation forecast at 5.8 percent for this year, but raised its projection to 4.5 from 4.3 percent for next year.

Medalla said inflation may peak to at least 8.1 percent for this month after accelerating further to a 14-year high of eight percent in November from 7.7 percent in October.

Inflation averaged 5.6 percent from January to November, well above the BSP’s target range of two to four percent.

According to the BSP chief, inflation may start to ease starting January next year, but would remain elevated above the target range in the first half of 2023 before improving close to three percent by the third quarter of next year.

“To use our technical language, we want a target-consistent path, which means that inflation’s path will move toward the target hopefully by the third quarter of next year,” he said.

Aside from taming inflation, the BSP has been successful in stabilizing the peso, which slumped by as much as 15.7 percent to hit an all-time low of 59 to $1 in October.

After a series of aggressive rate hikes and active intervention in the foreign exchange market to smoothen the volatility, the local currency has bounced back strongly to the 55 to $1 range.

“The worst is over for the strong dollar,” Medalla said.

Medalla pointed out that the peso is no longer a major concern for monetary authorities.

“I’m just saying that the weak peso further aggravating the inflation is no longer a big problem,” he said.

According to Medalla, the BSP still participates in the foreign exchange market to buy and sell dollars, unlike during the steady weakening of the peso.