BSP chief sees no end yet to tightening cycle
MANILA, Philippines — A possible rate hike in November may not be the last with the expected higher-for-longer interest rate environment amid more upside risks to inflation, according to Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. In an interview aired on Bloomberg Television, Remolona said monetary authorities are not convinced that the possible rate hike in the next rate-setting meeting on Nov. 16 would be the last.
“It won’t be the last hike in the cycle, we’re not convinced of that… So now, we’re still in a hawkish stance,” Remolona said.
After the BSP kept key policy rates on hold for the fourth rate-setting meeting since May amid the inflation downtrend and the slower-than-expected gross domestic product (GDP) growth in the second quarter, Remolona signaled the possibility of a rate hike in November amid the upside risks to inflation.
The BSP emerged as the most aggressive central bank in the region when it raised interest rates by 425 basis points between May 2022 and March 2023 to tame inflation and stabilize the peso.
Inflation quickened to 5.3 percent in August after easing for six straight months to 4.7 percent in July from a peak of 8.7 percent in January, This brought the average to 6.6 percent from January to August, still above the central bank’s two to four percent target range.
“Well, the inflation number, the last number that came in was worse than before, but it was not enough for us to hike at this time. But at the same time, the upside risks seem more likely than usual and that to me means that there is a good chance for a hike the next time. So we will see, we’ll have to watch the numbers,” Remolona said.
Had inflation last month been just a bit worse, the central bank would have resumed its tightening cycle last Thursday.
“If the inflation numbers had been just a bit worse, we might have gone for a hike this time. Nonetheless, the vote was unanimous, but the numbers were pretty close between hiking and not hiking,” he said.
Due to the higher-than-expected inflation outturn in August as well as upside risks, the BSP decided to raise its inflation forecasts to 5.8 percent from 5.6 percent for this year and to 3.5 percent from 3.3 percent for next year.
The BSP chief said monetary authorities are closely watching transport fare hikes that are likely to go up as well as electricity rates amid the soaring global oil prices.
According to Remolona, both upside risks are expected to add 0.50 percent to the projected inflation next year.
After raising interest rates by 525 basis points since March last year that brought the fund rates to a range of 5.25 to 5.50 percent, the US Federal Reserve also decided to pause by keeping rates unchanged, but it is expected to deliver another rate hike for the rest of the year.
“The Fed is not a big factor this time. It almost seems like they move to anticipate what we will do,” Remolona said.
He said the US Fed is dovish for this year but hawkish for next year.
Likewise, Remolona said the BSP is not concerned about the weakening of the peso that almost touched the 57 to $1 level anew on Thursday due to uncertainties about the global economic slowdown.
“Currency weakness has been a factor but not that much of a factor. The weakness seems not to come from the difference in policy rates between us and the US. It comes more from uncertainty about the economic outlook. As you know, it’s not so much peso weakness, it’s more dollar strength,” the BSP chief said.
Due to the aggressive rates hikes and active intervention in the foreign exchange market, the peso strengthened back to the 53 to $1 level in February before weakening anew to almost 57 to $1 late last month and this month due to the rate hikes delivered by the US Fed and the decision of Fitch to downgrade the credit rating of the US to AA+ from AAA.
“Currency protection is a small thing for us at this point… The movements have not been that sharp. Usually small movements don’t affect expectations of inflation in the Philippines. Once they become very sharp then it begins to affect expectations and that is what we worry about. But so far it has not been the case,” he said.