‘Rate cut premature’

Eli Remolona
STAR / File

MANILA, Philippines — Talking about cutting interest rates ahead of the US Federal Reserve can be considered premature as the central bank remains in a wait-and-see mode as to how the one-year policy tightening will impact the economy.

In a television interview with Bloomberg, Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona said a possible rate cut appears to be far off the table as upside risks to inflation persist even as the headline rate is on a downward trend.

“It is premature to talk about a rate cut because the economy is still very strong and inflation is still above our target range, so we will have to see,” Remolona said.

“For now, we are contemplating whether to hike or not to hike. We are not thinking whether to cut or not to cut,” he said.

Remolona said that as an inflation-targeting central bank, the BSP is hawkish when it comes to hitting the target range of two to four percent.

As of now, inflation eased for the fifth straight month and settled at 5.4 percent in June. For the first semester, however, the headline rate is at 7.2 percent, way above the economic team’s assumption of five to six percent for 2023.

“We are worried about the upside risks, such as El Niño, minimum wages being raised. We worry more about the second-round effects,” Remolona said.

The persistent inflation problem since last year prompted the central bank to raise key policy rates by a total of 425 basis points.

It was only in May when the BSP finally took a pause in its tightening cycle and extended its halt at 6.25 percent last month.

Remolona said the BSP is in pause right now to see how the yearlong tightening cycle has worked its way through the economy.

“Our models have not been calibrated for the kinds of supply shocks that we saw. We want to look more closely at what is going on in the economy and we will decide based on that,” Remolona said.

Based on BSP forecast, inflation will be back within target by the fourth quarter and start going below two percent by the first quarter of 2024.

The BSP chief said a rate cut may also be considered if there is a risk of recession.

“With the US Fed in hiking mode, global financial conditions might tighten and there might be a global recession. And then we would have to consider a rate cut just to protect ourselves from the global recession,” Remolona said.

The US Fed is slated to meet next week and has already signaled another rate increase after taking a pause last month.

On the domestic front, the BSP is not due for another policy meeting until August.

“The tricky thing is that three weeks is an eternity for financial markets, so if the difference between the policy rate of the Fed and our policy rate becomes too wide, it kind of makes some market participants feel uneasy, and they may retreat from the peso,” Remolona said.

“Small movements in the peso are OK, it doesn’t worry us. But sometimes if it’s a sharp movement then it begins to affect expectations, and then we begin to worry,” he said.

Show comments