BSP's Medalla says inflation battle to continue despite 'contagion risk'
MANILA, Philippines — The Bangko Sentral ng Pilipinas justified its latest rate hike and said taming inflation would not take a backseat despite risks of financial contagion from recent US bank failures.
BSP Governor Felipe Medalla elaborated on this on Friday, after an interview with CNBC. On Thursday, the central bank lifted its key rate by 25 basis points to 6.25%, as persistent supply-demand imbalance continued to stoke inflation.
“While some have raised concerns that price stability may take a backseat to financial stability in light of the recent global banking turmoil, the situation is quite different here in the Philippines,” Medalla said in a series of tweets.
The BSP boss already mentioned some of these points on Thursday, considering that the BSP matched the US Federal Reserve’s rate action.
The BSP’s 25 bps rate hike came at the heels of financial contagion fears enveloping the US economy. Experts blamed hefty interest rate hikes as one of the culprits which caused a series of bank runs in the world’s largest economy in March. The collapse of US-based Silicon Valley Bank in past weeks, followed by other mid-sized lenders, rocked the global economy as banking stocks plummeted everywhere.
“We can afford to focus on our first pillar, price stability, and bringing inflation to a target-consistent path because our second pillar, financial stability, remains exactly that: a pillar of strength,” Medalla said.
Authorities quickly assured that Philippine banks, and by extension the country’s financial system, were not exposed to the contagion from the US.
READ: BAP: Philippines' banking system not exposed to US fallout | Philippine banks not affected by SVB demise’
That Medalla reiterated this reflected the country’s inflation woes. Consumer price growth currently hovered at 8.6% year-on-year in February, accelerating to highs unseen in 14 years. Supply bottlenecks and expensive fuel prices have sapped the public’s purchasing power.
Despite this, the BSP already revised its inflation forecast for this year and the next, on the basis of a gloomy global outlook and the cooling impact of the interest rate hikes on the economy. For 2023, the central bank expects inflation to average 6% from the previous 6.1%, breaching its 2-4% while in 2024, they forecast inflation to move at a pace of 2.9%.
Central banks, like the BSP, use rate hikes to rein in demand pressures that are stoking price growth. The higher interest rates work by prompting consumers and businesses to think twice about borrowing money. This, in turn, lessens the money that’s circulating in the economy and chasing a limited supply of consumer items.
These rate hikes take 12 to 18 months before it seeps into the economy.
“We believe we have done almost enough and are confident that non-monetary interventions by the national government will complement our efforts and help bring inflation under control,” Medalla said.
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