MB split on amount of rate hike

Lawrence Agcaoili - The Philippine Star

MANILA, Philippines — The seven-member Monetary Board is split between a 25- and 50-basis-point hike for its last rate-setting meeting for the year scheduled on Dec. 15, according to Bangko Sentral ng Pilipinas Governor Felipe Medalla.

Medalla, who chairs the Monetary Board, said that it is unlikely for the central bank to take a pause from its tightening cycle this month after raising key policy rates by 300 basis points to tame inflation and stabilize the peso.

“Certainly we will not do zero and I cannot speak for the rest of the board. But I think the board members will probably be split between doing 25 or 50 (basis points). And I don’t know exactly whether the split is a little bit more for 50 or a little bit more for 25,” Medalla said in an interview with Bloomberg Television.

Last Nov. 17, the central bank delivered another aggressive 75-basis-point hike that brought the overnight reverse repurchase rate to a 14-year high of five percent from an all-time low of two percent to help insulate the economy from external headwinds and exchange rate fluctuations that could further entrench price pressures and potentially dislodge inflation expectations.

The Philippines started its interest rate liftoff in May with a 25-basis-point hike followed by another 25 basis points in June. In a surprise off-cycle rate setting meeting last July 14, the Monetary Board delivered a huge 75-basis-point increase.

This was followed by 50-basis-point rate hikes each in August and September as well as the increase of 75 basis points last Nov. 17.

Medalla explained that the Monetary Board was forced to raise interest rates earlier than expected due to quickening inflation as well as the weakening of the peso due to the hawkish US Federal Reserve.

To begin with we were already planning to raise because two percent was our very anti-COVID policy. But we ended up raising a lot more than we expected because of what happened to the US and because inflation was also quite high,” Medalla said.

After matching the rate hikes of the US Fed point by point last month, Medalla said BSP is relieved after Fed chair Jerome Powell signaled that it could slow its rapid pace of interest rate increase starting this month.

“The worst case scenario is 50 (basis points) and several 25s. And by the third or fourth quarter of next year no more increases and possibly a reduction maybe in the fourth quarter of 2023,” the BSP chief said.

In its latest assessment, the BSP Monetary Board now expects inflation to average 5.8 instead of 5.6 percent for this year and 4.3 instead of 4.1 percent for next year, both above the government’s two to four percent target range.

Inflation is seen easing back to within the target at 3.1 instead of three percent in 2024.

Inflation averaged 5.4 percent in the first 10 months of the year after quickening to a 14-year high of 7.7 percent in October from 6.9 percent in September. The BSP said inflation for November likely settled between 7.4 and 8.2 percent.

According to Medalla, the robust economic growth provides monetary authorities flexibility in bringing inflation back to within the two to four percent target range.

After exiting the pandemic-induced recession with a gross domestic product (GDP) growth of 5.7 percent last year from a 9.6 percent contraction in 2020, the Philippines sustained the momentum with a 7.7 percent expansion from January to September this year

The GDP growth accelerated slightly to 7.6 percent in the third quarter from 7.5 percent in the second quarter despite the elevated inflation and series of rate hikes, placing the country in a strong position to meet the 6.5 to 7.5 percent target penned by economic managers.

Despite the decision of the International Monetary Fund (IMF) to lower the country’s projected GDP growth to five percent next year from the expected 7.1 percent this year, Medalla is optimistic that the government’s 6.5 percent to eight percent target is achievable.

“Of course anything can happen. The reason why I am optimistic is remember that a lot of capital expenditures, both private and public, were postponed because of the lockdowns in the pandemic. And now they are catching up,” Medalla said.

The BSP chief cited the increasing car sales in the country as well as the improving tourism, both international and local.

For 2023, Medalla tagged another supply shock as a major risk to economic growth.

“The biggest risk is another supply shocks, where it will come from,” he said.


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