BSP chief open to off-cycle increase

BANGKO SENTRAL ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. on Monday said he is open to an off-cycle interest rate increase before the Monetary Board’s policy meeting on Nov. 16.

Upside risks to inflation may prompt the BSP to hike rates by 25 basis points (bps) earlier than November, analysts told BusinessWorld.

“I am open to an off-cycle increase,” Mr. Remolona said in an interview with Bloomberg News in Manila on Monday, acknowledging that his rhetoric has become “more hawkish” since taking office in July (Full story on https://www.bworldonline.com/bloomberg/2023/09/26/547814/remolona-open-to-an-off-cycle-rate-hike/ ).

Mr. Remolona also said that it would be “too soon” to pivot to cutting the policy rate in the first six months of 2024, and that he is “willing to stake” his credibility that an easing won’t happen during that period. 

“For a rate cut, you need the economy to slow down significantly and inflation to maybe go below the target range,” said Mr. Remolona. “That’s why I don’t think there will be a rate cut that soon.”

The Monetary Board kept the benchmark interest rate steady for a fourth straight meeting at a near 16-year high of 6.25%. It was also the second meeting led by Mr. Remolona.

Even after consumer prices rose for the first time in seven months in August, the BSP still projects inflation to return to the 2-4% target by November. 

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail that upside risks to the inflation outlook such as hikes in oil, electricity and wages could prompt an off-cycle increase.

“Despite BSP projections for inflation to dip back within target by November and (Mr. Remolona’s) own indications that the peso is not at all under any undue pressure, he appears to be pining to hike rates to deal with projected risks to the inflation outlook,” Mr. Mapa said.

However, an off-cycle rate hike may affect the BSP’s reputation as an inflation fighter, especially when there are no “compelling reasons” to do so, as the central bank intends to hike rates amid supply-side price pressures, Mr. Mapa said. 

“We will likely see rate hikes continue with little impact on the actual inflation path. Thus, we can say, the governor is clearly a hawk with real rates his primary objective, with less regard for the source of price pressure nor the impact of tightening on growth,” he said. 

On the other hand, an off-cycle rate increase may improve the central bank’s credibility given many uncertainties in the outlook, Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said in a Viber message.

“A relentless surge in commodity prices, or a rapid strengthening of the dollar, or a reacceleration of US inflation which could fuel inflationary expectations are just a few examples of what can trigger an off-cycle adjustment before November,” he said. 

Mr. Neri added that a more hawkish bias from the BSP will reduce the likelihood of panic, as it discourages excessive risk-taking among market players.

China Banking Corp. Chief Economist Domini S. Velasquez said the BSP may consider a possible off–cycle hike amid recent pressures on the peso against the dollar. 

“However, as the fourth quarter nears, we think that remittances will relieve some of the pressure on the currency and that there would not be a need for an off-cycle rate hike,” Ms. Velasquez said. 

Remittances typically surge in December as migrant Filipinos usually send more money to their relatives during the holidays. Cash remittances jumped to a record-high of $32.54 billion in 2022.

“It would be prudent to wait for the regular policy meeting of the BSP than conduct an off-cycle hike to avoid market speculations, unless warranted by a sudden unanticipated shock,” Ms. Velasquez said.

Meanwhile, Mr. Mapa said he expects Philippine GDP to slow to 4.8% this year and 4.7% for 2024. Both projections are below the government’s growth target of 6-7% for 2023 and 6.5-8% for next year. 

He also sees full-year inflation to settle at 6% this year, before easing to 3.7% in 2024. These estimates are also higher compared with the BSP’s revised 5.8% and 3.5% forecasts. 

“The tradeoff is clear, we will need to brace for an extended period of higher rates and slower growth, something the new governor indicates he is willing to accept. Rate hikes and growth clearly do not mix,” Mr. Mapa said. — Keisha B. Ta-asan with Bloomberg