BSP on guard vs entrenched high inflation

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is keeping a close watch on inflation expectations as it uses interest rates not only to temper price pressures but also to prevent high inflation from becoming entrenched, even as economic growth remains weak.

BSP Governor Eli Remolona Jr. said the possibility that inflation expectations could become unanchored remains a key concern for the central bank, particularly given the country’s history of elevated inflation.

“It’s one of the things that keeps me awake at night, the possibility that our inflation expectations will de-anchor, which is what happened in the past, and then it becomes much harder to manage inflation,” Remolona said in an interview with ANC.

He said monetary policy plays a role not only in bringing actual inflation down but also in shaping how households and businesses expect prices to behave.

“So, you don’t just move the policy rate to reduce inflation, you also move the policy rate to influence expectations,” he said.

The BSP’s Monetary Board raised the benchmark interest rate by 25 basis points to 4.75 percent on June 18, its second consecutive hike, as the inflation outlook deteriorated amid the conflict in the Middle East, higher global commodity prices and peso depreciation.

Headline inflation eased to 6.4 percent in June from 6.8 percent in May but remained well above the BSP’s three percent target. Core inflation, which strips out volatile food and energy items, accelerated to 4.4 percent from 4.1 percent.

The BSP’s renewed tightening comes as the economy loses momentum. Gross domestic product expanded by only 2.8 percent in the first quarter.

Despite the risk that higher borrowing costs could further weigh on activity, Remolona stressed that price stability is itself necessary for sustainable economic growth.

“If you have price stability, which means low inflation, that’s very helpful to growth because high inflation makes it difficult to plan, to invest and so on. So, it’s underlying stability that promotes growth,” he said.

Remolona also underscored the importance of central bank independence in making policy decisions that may be unpopular in the short term but necessary to preserve stability.

“The central bank needs independence to do the hard thing that doesn’t make the crowd happy, but which will be good for the economy and for the population as a whole down the road,” he said.

On financial stability, Remolona said the BSP continues to focus supervision on systemically important banks, whose size, interconnectedness and critical market functions could amplify stress across the financial system.

He said tighter regulations and lessons from past crises have helped Philippine banks remain relatively prudent, although risks have not disappeared.

“Accounting has become forward-looking. You anticipate defaults and you reserve against those things,” he added.