BSP to keep hawkish stance for rest of 2022

Customers are seen at an outdoor restaurant in Antipolo, with the Ortigas skyline in the background, May 27, 2021. — PHILIPPINE STAR/ MICHAEL VARCAS

By Keisha B. Ta-asan

BANGKO SENTRAL ng Pilipinas (BSP) Governor Felipe M. Medalla did not rule out further interest rate hikes this year, after the widely expected tightening at its meeting today (Aug. 18).

“As to whether there will be more rate hikes in the remaining meetings (this year), we will not rule them out,” he said at the Economic Journalists Association of the Philippines forum on Wednesday.

“Now exactly how many rate hikes that would require, it’s hard to forecast because a lot of the things that drive inflation may subside.”

The BSP is widely expected to raise the benchmark rate today, with most analysts forecasting a 50-basis-point (bp) increase. If realized, this would bring the benchmark rate to 3.75% from the current 3.25%

A BusinessWorld poll last week showed 13 out of 18 analysts expect the Monetary Board will raise its benchmark interest rate by 50 bps, and three seeing a 25-bp increase. Only two analysts expect the BSP to keep rates unchanged. 

The BSP is maintaining a hawkish stance as it seeks to tame inflation, which quickened to a near four-year high of 6.4% in July.

Inflation averaged 4.7% in the January to July period, above the BSP’s 2-4% target band for the year, mainly due to soaring food prices and higher transport costs.

The central bank in June raised its average inflation forecast for this year to 5%, from 4.6% previously.

For 2023, the BSP’s inflation forecast was revised upward to 4.2% from 3.9% previously. Average inflation is expected to decline to 3.3% in 2024.

“We should aim for a point lower than 4% next year and a point close to 3% in the following year. Of course, the rest of the term of the current president, (inflation) should be between 2-4%,” Mr. Medalla said. 

Socioeconomic Planning Secretary Arsenio M. Balisacan said inflation, particularly in food, may dampen the economy’s recovery as well as poverty reduction efforts.

“As Governor Medalla has already pointed out, inflation remains a challenge, especially for the poor. I want to add that food inflation, especially, is a primary determinant of poverty simply because food constitutes a more significant proportion of the expenditure of poorer households,” Mr. Balisacan said. 

“For the poorest 10% of the population, food and beverages constitute nearly 60% of food expenditures. Rapid increases in food prices could very well dampen the effect of economic growth on poverty reduction,” he added. 

Asked what measures the government could implement to bring down food inflation, Mr. Balisacan said he favors targeted subsidies for the most vulnerable sectors.

“We should not use price controls to control inflation or temper food prices, because that does more harm than good, especially for the medium and longer term now,” he said.

“What we can do instead is to use the, no matter how small, resources to target the very vulnerable, particularly the poor groups through the 4Ps or cash transfers,” he added, referring to the Pantawid Pamilyang Pilipino Program (4Ps).

Mr. Balisacan said the government is ramping up the issuance of national IDs to ensure those who are deserving of subsidies will receive them.

“Moving forward, we just need to make markets more competitive, more efficient, reducing barriers to entry particularly in sectors that are highly protected so that you don’t get into a situation where the demand is rising,” he added.

Meanwhile, Mr. Medalla reiterated the BSP’s policy settings remain supportive of economic growth despite the current tightening cycle.

Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said the economy can absorb more rate hikes this year as the key policy rate is still below the pre-pandemic level.

“There are criticisms to not hike so much because the second-quarter numbers were weak. But if you think about it what was the weakness of the second quarter, it was inflation right?” Mr. Neri said in an interview on the sidelines during the forum.

“So you have to continue the fight against inflation to provide a better environment for growth. That’s why they have to continue rate hikes,” he added.

The Philippine economy expanded by 7.4% in the second quarter.

The government is targeting a 6.5-7.5% gross domestic product for this year.