MANILA, Philippines — The ongoing tightening cycle of the Bangko Sentral ng Pilipinas (BSP) through a series of interest rate hikes has so far succeeded in anchoring inflation expectations.
BSP Governor Felipe Medalla said in an interview with Bloomberg Television that the 175-basis-point hike in the past four months has curbed rising inflationary pressures.
“I think we have more or less succeeded in anchoring inflationary expectations. Also, our forecast is that if we had done nothing, average inflation next year will be around four percent, which is too close for comfort. So that’s why we increased by 50 (basis points),” Medalla said.
Since starting its liftoff last May, the BSP has raised the reverse repurchase rate to 3.75 percent from an all-time low of two percent. This included the huge 75-basis-point hike during a surprise off-cycle rate-setting meeting last July 14.
The BSP chief said monetary authorities in the country would continue to closely watch the actions of the US Federal Reserve.
“Of course, many other things can happen that can bring up our inflation forecast again. As you know, it’s very fluid like you have falling oil and commodity prices, which we’re beginning to observe. On the other side, you have the Fed repeating the 75s, which I think it’s very likely. So those are the things that make it rather uncertain so it can go it can go either way,” Medalla said.
According to Medalla, the biggest source of uncertainty right now is how big the US Fed hikes will be and how many. “Of course, though we will not match them point for point. If they are large, we have to react,” Medalla said.
Based on Thursday’s assessment, the BSP raised its inflation forecast to 5.4 percent instead of five percent for this year but lowered the projections to four percent for next year and to 3.2 percent for 2024.
Inflation averaged 4.7 percent from January to July, exceeding the BSP’s two to four percent target range.
According to Medalla, inflation is likely to peak either in September, October, and November before returning to the midpoint of the two to four percent target by the second half of next year.
“If that happens, then we have achieved our goal of meeting the inflation target next year. Of course there is nothing we can do for the inflation target this year,” he said.
Economists still expect the BSP’s tightening cycle to continues until the end of the year.
In a separate interview with CNBC, Medalla said the BSP’s future rate hikes would not be as aggressive as the previous increases.
“Offhand, it is very hard to say what will happen in the future. Future rate hikes, if necessary, will not be 50 or 75 (basis points). I think we have achieved enough and done enough to anchor inflationary expectations,” Medalla said.
Meanwhile, the BSP chief said the regulator is putting on hold further cuts in the reserve requirement ratio (RRR) until the extraordinary measure allowing banks to book loans extended to micro, small and medium enterprises (MSMEs) expires at the end of the year.
“We don’t want to confuse the market,” Medalla said.
The BSP has committed to bring down the level of deposits banks are required to keep with the central bank to single-digit level by 2023.
As part of its COVID response measures, the BSP lowered the RRR for big banks and slashed interest rates by 200 basis points to an all-time low of two percent in 2020 to cushion the impact of the global health crisis on the economy.
From a high of 20 in 2018, the portion of reserve liabilities that universal and commercial banks must hold on to instead of lend out or invest currently stands at 12 percent.
The BSP also lowered the RRR for mid-sized and small banks by 100 basis points to three percent and two percent, respectively.