BSP ready to resume tightening if necessary

THE BANGKO SENTRAL ng Pilipinas (BSP) is ready to resume its policy tightening if necessary, an official said, as inflation continues to be a challenge.

“The BSP remains watchful and remains ready to resume monetary tightening as warranted by the data on the inflation outlook and domestic demand prospects,” BSP Deputy Governor Francisco G. Dakila, Jr. said during the Philippine economic briefing in Pasay City on Tuesday.

The Monetary Board hiked borrowing costs by a total of 425 basis points (bps) from May 2022 to March 2023, bringing the key rate to 6.25%.

Mr. Dakila said the focus remains on reining in elevated inflation, adding that “future monetary policy actions by the BSP will continue to be data-dependent and guided by evolving domestic developments, particularly the latest outlook on inflation and sustained economic growth.”

In a recorded message at the same briefing, BSP Governor Eli M. Remolona said inflation will be within the target range of 2-4% by the fourth quarter of 2023.   

“Our challenge now is inflation. Fortunately, the BSP’s inflation-targeting framework has served us well in the face of unusual supply shocks. We continue to focus on our mandate of price stability and have dedicated our resources and attention in pursuit of this goal,” he said.

Inflation eased to a 14-month low of 5.4% in June. However, this is still above the BSP’s 2-4% target range for the 15th consecutive month. 

For the first six months of the year, headline inflation stood at 7.2%. The BSP expects inflation to average 5.4% this year.

According to Mr. Dakila, inflation is projected to further decelerate in the coming months mainly due to base effects and the likely easing of global oil and non-oil prices. He said the BSP’s main concern is anchoring inflation expectations.   

“There was a point, during the second half of last year, when the Fed was quite aggressive in adjusting its policy rate, introducing some volatility in the exchange rate. That has been addressed by the prompt monetary policy action of the Monetary Board,” he said.    

From March 2022 to June 2023, the Fed raised its key rates by 500 bps to 5-5.25%.   

In October last year, the peso hit a record low of P59 against the dollar. Market players are concerned over another round of currency depreciation against the greenback this year, as the US Federal Reserve is still expected to raise policy rates despite its pause in June.   

Mr. Dakila said the Monetary Board will have to take into consideration how the market reacts to the possible Fed hike before discussing policy at its Aug. 17 meeting.

“By then, we will have a number of observations on how the market reacts to the Fed decision. What’s good is that we have a number of improvements that we have introduced in our policies that enhance the transmission of these instruments to market interest rates, including the 56-day BSP bill,” he said.

Last month, the BSP introduced the 56-day BSP securities to mop up excess liquidity in the financial system. It also created an overnight reference rate as the London Interbank Offered Rate expired on June 30.   

“[The BSP] should bear in mind the interest rate differential between the Fed and the Philippines in order to minimize the risk of excessive capital outflows,” IMF Representative to the Philippines Ragnar Gudmundsson said during the same briefing.

“The decision making needs to be quite nimble, but the BSP has demonstrated its ability to be nimble and take into account both domestic and external factors in its decision making,” he added.    

Meanwhile, the BSP is confident that the policy rate adjustments will not negatively affect the financial system. 

“We are confident that the policy rate adjustments as well as the years of implementation and enforcement of the BSP’s comprehensive policy tools and regulations, will not result in financial imbalances as the Philippine banking system continues to stand in a position of strength,” Mr. Dakila said.   

Based on BSP data, the net profit of Philippine banks grew by 34.9% year on year to P89.5 billion in the first quarter.

“We see banks remaining well-capitalized, well-managed and well-governed, giving us confidence that the policy rate adjustments were done without risking financial stability,” Mr. Dakila said. — Keisha B. Ta-asan