No more jumbo rate hikes — Medalla

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THE BANGKO SENTRAL ng Pilipinas (BSP) is ruling out another jumbo rate hike as it expects the US Federal Reserve to slow the pace of tightening in December.

BSP Governor Felipe M. Medalla said on Tuesday that the policy decision at its Dec. 15 meeting will depend on the latest move by the Fed, which will have its own meeting on Dec. 14-15.

“My own reading is that the US will keep on raising (rates) but no more 75 (basis points), so that will be a lot less painful for economic growth in the Philippines,” he told reporters on the sidelines of an event hosted by FinTech Alliance.PH. 

“But the outlook is that maybe the US will just do a 50 and a 25, of course I can be wrong. I think they are (done with 75 bps) and so are we.”

If the Fed will hike by 50 bps, Mr. Medalla said the BSP cannot afford to keep rates unchanged.

The US central bank raised rates by 375 bps since March, including its fourth 75-bp rate hike earlier this month, bringing its benchmark interest rate to a 3.75-4% range. 

Last week, the BSP increased its benchmark rate by 75 bps to 5% — the highest in nearly 14 years. It has so far hiked rates by 300 bps since May to tame inflation. 

Mr. Medalla said the Monetary Board’s next policy move will also depend on the latest inflation data.

Headline inflation stood at 7.7% in October, marking the seventh straight month that inflation breached the BSP’s 2-4% target range. In the 10-month period, inflation averaged 5.4%, still lower than the BSP’s revised 5.8% full-year forecast.   

Mr. Medalla said it is too early to tell if the BSP will likely pause its monetary tightening next year as inflation is still expected to stay above target in 2023.   

“Are we confident that inflation will return to the 2% (target) by second half next year? If inflation lasts longer than that, it could disanchor inflationary expectations,” he said.   

“What worried us is the last survey of analysts and economists, average inflation forecast is much higher than ours. It’s much higher than 3%. In the case of next year, it is much higher than 4%. That’s alright as long as they believe that it will be between 2% and 4%, possibly closer to 3%, by the second half,” he added.   

In 2023, the BSP sees average inflation settling at 4.3%, before easing to 3.1% in 2024. 

According to the BSP chief, its recent policy adjustments will help prevent lingering supply shocks.

Mr. Medalla said there is no need for another off-cycle move.

“I think we will succeed in controlling second order effects and when that happens, unless there are new shocks by the second half (next year)…wala na ’yung (there will be no) extra inflation,” he said.

Meanwhile, former BSP Deputy Governor Diwa C. Guinigundo said he believes the central bank is on the right track.

“While we may have different business and financial cycles, US Fed interest rate moves practically dictate the tempo and magnitude of monetary policy for many relevant economies,” Mr. Guinigundo said in a Viber message.   

“Otherwise, without an appropriate response, we might be seeing another round of peso depreciation with inflationary consequences,” he said, adding that the BSP needs to be careful in monitoring macroeconomic developments.   

Mr. Guinigundo said the fight against inflation might be less challenging next year.

“By next year, we should be reaping the rewards of this year’s tightening response. Those big moves somewhat compensated for the time lost in delayed policy response,” he said.

“The good economic outturn for the third quarter illustrates that the economy is resilient enough to absorb contractionary monetary policy and weaken those inflationary pressures,” he added.   

The Philippine economy grew by 7.6% in the third quarter, faster than the revised 7.5% in the second quarter. Growth in the first three quarters of the year averaged 7.7%. 

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said staying in lockstep with the US Federal Reserve is necessary until inflation has been contained. 

“Otherwise, the authorities might be compelled to further deploy non-market-based policy tools to stabilize (the foreign exchange) along with domestic prices. The Philippines can afford to slow down on its hikes too if (by second half of 2023) inflation trends suggest a return to target by 2024,” he said.

“If, however, external and internal factors lead to persistence of above-target prints through late 2023, our inflation targeting central bank may not have the space to ease policy settings immediately,” he said. 

Mr. Neri also added that authorities should consider rebuilding the country’s dollar buffers before reversing its current policy tightening.

The country’s gross international reserves reached $94.1 billion as of end-October, up 1.9% from the $93 billion as of end-September. This was 12.8% lower than the dollar reserves of $107.89 billion as of end-October 2021. — Keisha B. Ta-asan