High interest rates clipping growth – BSP

MANILA, Philippines — Higher for longer interest rates could lead to unnecessary loss of economic growth, according to Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr.

During the Economic Journalists Association of the Philippines – San Miguel Corp. economic forum yesterday, Remolona said the BSP would not wait too long to start monetary policy easing this year as the current restrictive rate environment could “overdo” in quelling demand.

Remolona said the central bank is now in its “last mile” in fighting against inflation, where the Monetary Board is trying to be very careful in balancing supply and demand.

“At this point in the last mile, we’re almost there, but we have to be more careful than before because there’s a risk we might overdo it. There’s a risk we might cause unnecessary loss of output, and we want to minimize that risk,” the BSP chief said.

There is also more scope for policy easing in August following the better-than-expected inflation print in June, the central bank governor said.

Data from the Philippine Statistics Authority showed that inflation eased to a four-month low of 3.7 percent in June from 3.9 percent in May, snapping four straight months of increases.

In the first half of the year, average inflation stood at 3.5 percent, still above the BSP’s risk-adjusted forecast of 3.1 percent for the whole year.

The BSP has been keeping borrowing costs unchanged since it delivered its aggressive 450-basis-point hikes from May 2022 to October 2023, bringing the key interest rate to a 17-year high of 6.50 percent.

However, Remolona has earlier hinted at the possibility of a 25-basis-point cut at its next meeting on Aug. 15. The last time the central bank did a similar move was when it brought down the key rate to the record low of two percent in November 2020.

Asked if the BSP will cut borrowing costs ahead of the US Federal Reserve, Remolona said the US central bank is only among the data that the Monetary Board reviews.

“I think the Fed is not the most important data among the numbers that we look at. It affects our exchange rate and the exchange rate affects inflation, so that’s factored in, but it’s not a decisive factor,” he said.

The BSP chief reiterated that the pass-through effect of the weaker peso to inflation is limited, noting that the volatility in the foreign exchange market was due to global economic uncertainties.

However, the Philippine central bank does not want the peso to weaken against the dollar too sharply.

“We want the peso to move based on fundamentals. When there’s too much volatility, it’s bad for trade. It’s bad for both imports and exports. So we want to make the movement of the peso smoother,” Remolona added.

The peso has been above the 58 to $1 level since May amid market expectations that the Fed might only start cutting borrowing costs in September.