BSP’s Remolona open to more interest rate hikes

MANILA, Philippines — The Bangko Sentral ng Pilipinas said interest rate hikes remained on the table signalling that the threat of inflation has not abated.

That was the assessment BSP Governor Eli Remolona said in a Bloomberg TV interview on Sunday.

“For now, we’re contemplating whether to hike or not to hike. We’re not thinking about whether to cut or not to cut,” he said. 

The BSP embarked on an aggressive campaign to combat inflation last year. Beginning May, the central bank has injected 425 basis points into the benchmark lending rate. This marked the BSP’s departure from its ultra-loose policy rate of 2%, which was cut by 200 bps in November 2020 to allow credit to grow. At that time, the domestic economy contracted as a result of mobility restrictions to arrest the spread of virus contagion. 

Right now, Remolona said the BSP is leaning towards the “tightening side.” 

Inflation grew feverishly towards the end of 2022. By then, the Philippine economy was dealing with supply chain disruptions, a weak peso, and an eventual reopening to activity that fueled consumer price growth. 

Inflation hit a 14-year high when it ended 2022 but the past months marked a softening of sorts. 

The combination of the delayed impact of rate hikes and imports curbed the acceleration of price growth. To this end, Remolona remains wary of risks, ranging from El Nino and minimum wage hikes in Metro Manila. 

The Marcos Jr. administration’s economic managers opined in April that the global weather phenomenon will not dent its growth aspirations, projecting the impact of a dry spell on farm production will not be severe. The last time El Nino hit agricultural output at worrying levels was back in 2019, when it cost the sector P7.96 billion in losses in April. 

The national government approved a P100 daily minimum wage hike in Metro Manila earlier this month. Experts weren’t too worried over concerns that this would fan price growth. 

That said, hopes surrounding headline inflation landing in the BSP’s target remain, Remolona insisted. He projected inflation will fall within 2-4% in the next quarter.

“We might overshoot on the low side and go below 2% in the first quarter of next year, then what we hope to happen is inflation to settle within the target range,” Remolona added. 

The new central bank chief, who replaced Felipe Medalla on June 30, noted hints of a global recession could compel them to start cutting rates. As it is, worries that the global economy will slow down took shape in recent months as inflation proved to be a sticky problem for advanced economies despite higher lending rates.

Remolona noted that a rate cut will happen depending on the domestic economy’s health and when inflation starts hitting the 2-4% target. 

As it is, the US Federal Reserve is eyeing another rate hike in its July meeting. 

“What might happen, this won’t happen very soon but with the Fed in hiking mode, global financial conditions might tighten then there might be a global recession and then we would have to consider a rate cut just to protect ourselves from a global recession,” he added.