Inflation seen to ease within target by October

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is now expecting inflation to return within its two to four percent target by October this year, which could warrant further tightening in the coming months.

BSP Governor Felipe Medalla said during the general membership meeting of the Chamber of Thrift Banks (CTB) that the new forecast is earlier than the previous projection that inflation would ease within the target range by November or December this year.

“We will have below four percent inflation if our forecasts are correct by October. And then back to normal inflation by the rest of the year,” Medalla said.

Last Thursday, the central bank’s Monetary Board dialed down its tightening cycle as it delivered a smaller 25-basis point increase after delivering back-to-back 50-basis point hikes in December and February.

This brought the cumulative rate hikes to 425 basis points since it started lifting interest rates in May last year to tame inflation and stabilize the peso that slumped to an all-time low of 59 to $1 last October.

The overnight reverse repurchase rate now stands at a 16-year high of 6.25 percent from an all-time low of two percent.

Medalla added that the BSP also lowered its inflation forecasts to six percent from 6.1 percent for 2023 and to 2.9 percent from 3.1 percent for 2024.

Inflation averaged 8.6 percent in the first two months of the year despite easing to 8.6 percent in February from a 14-year high of 8.7 percent in January.

The consumer price index accelerated to 5.8 percent last year, exceeding the central bank’s two to four percent target range, from 3.9 percent in 2021 due to soaring global oil prices brought about by Russia’s invasion of Ukraine as well as elevated food prices due to supply shocks amid the zero COVID-19 policy in China.

Medalla told members of the CTB that the central bank stands ready in bringing inflation towards a target consistent path.

He added that the country’s banking system is sound, stable, and supportive of economic growth despite the collapse of Silicon Valley Bank (SVB) and Signature Bank in the US as well as the crisis being faced by Credit Suisse in Europe.

“The BSP remains committed in providing an enabling regulatory landscape,” Medalla said.

According to Medalla, the assets of Philippine banks grew by 10.7 percent last year as the industry’s loan book expanded by 10.8 percent and deposit base increased by 9.4 percent.

Despite the rise in loans, Medalla said the industry’s non-performing loan (NPL) ratio improved to 3.16 percent, while NPL coverage ratio stood at 107 percent.

On the other hand, profits of Philippine banks jumped by 38 percent.

The industry’s capital buffer also stood at 15.8 percent, while liquidity buffer for the sector reached 185.7 percent.

For thrift banks, Medalla said total resources inched up by 3.6 percent as loans went up by 14.7 percent while deposits inched up by 3.6 percent.

The sector’s NPL stood at 7.1 percent, while NPL coverage remained at 66.4 percent.

The BSP chief said the earnings of thrift banks soared by 75.6 percent.

He added that the capital buffer of thrift banks stood at 19.2 percent and liquidity buffer amounted to 29.9 percent.