BSP holds rates steady

But November rate hike on the table

MANILA, Philippines — Monetary authorities are expected to deliver a rate hike in November after maintaining a hawkish pause for four straight rate-setting meetings, according to Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr.

Remolona, who also chairs the central bank’s Monetary Board, said in a press conference that monetary authorities are considering resuming its hiking cycle in the next rate-setting meeting scheduled on Nov. 16.

“Honestly, yes,” Remolona replied when asked if the BSP is considering a hike in November.

“A rate hike is on the table for November. How big it will be will depend on the data. How bad the data is with respect to inflation especially,” he said.

The BSP yesterday kept interest rates steady anew as part of a hawkish pause wherein key policy rates were left untouched in May, June, August and September.

“Rate cuts this year, 2023, are off the table. Yes, the cuts are off the table, while rate hikes are not off the table,” Remolona said.

The BSP chief pointed out that the BSP is likely to keep interest rates steady anew in the first half of next year.

“I expect rates to be at the level they are at at the end of this year. We have a meeting in November, so if we raise in November then I expect rates to stay at that level for the early part of next year,” he said.

At its meeting yesterday, the Monetary Board decided to maintain the BSP’s target reverse repurchase (RRP) rate at 6.25 percent. Accordingly, the interest rates on the overnight deposit and lending facilities were retained at 5.75 percent and 6.75 percent, respectively.

The Monetary Board raised interest rates by 425 basis points during a tightening cycle between May 2022 to March this year to tame inflation and stabilize the peso, which slumped to an all-time low of 59 to $1 last October.

Due to a downtrend in inflation and the slower-than-expected 4.3 percent gross domestic product (GDP) growth in the second quarter, the central bank has been able  to maintain a hawkish pause since May this year.

Remolona said the latest BSP baseline projections show a slightly higher inflation path, but it is still projected to revert to the two to four percent target range as early as November in the absence of further supply-side shocks.

“While food and transport prices continue to drive headline inflation, core inflation has moderated further, implying an easing in underlying pressures. In addition, inflation expectations remain anchored to the target range over the policy horizon,” Remolona said.

Remolona added that the balance of risks to the inflation outlook remains skewed toward the upside amid the potential impact of further adjustments in transport fares and electricity rates.

“The big ones are transport prices, because there have been petitions to increase this already in MRT3, jeepneys, and taxis. And then there’s electricity rates, which is very likely to be raised, because the ERC (Energy Regulatory Commission) has already said power companies may pass on increased costs to their customers,” he said.

Inflation averaged 6.6 percent during the eight-month period this year, well above the BSP’s two to four percent target range, after accelerating to 5.3 percent in August from 4.7 percent in July.

BSP senior assistant governor Iluminada Sicat said the Monetary Board decided to raise the inflation forecasts to 5.8 percent from 5.6 percent for this year and to 3.5 percent from 3.3 percent for 2024 to reflect the spillovers from weather disturbances, rising global crude oil prices, and the recent depreciation of the peso.

“The upward revision in the baseline forecasts were driven by the higher-than-expected inflation outturn in August, the higher inflation Nowcast for September, the continued uptick in the global crude oil prices and the depreciation of the peso,” Sicat said.

Sicat said projection for 2025 was retained at 3.3 percent.

Remolona said the Monetary Board noted that recent indicators of domestic economic activity pointed to waning pent-up demand, even as the impact of prior monetary policy tightening continues to weigh on credit.

“Given these considerations, the Monetary Board deemed it appropriate to maintain its pause amid the emerging upside risks to the inflation outlook. Looking ahead, the BSP stands ready to resume its tightening actions in the face of upside risks and potential second-round effects that could dislodge inflation expectations,” Remolona said.

According to the BSP chief, the Monetary Board also reiterated the need for non-monetary interventions, including the temporary reduction of import tariffs with calibrated volumes and timely arrival of import commodities.

After taking a pause from its tightening cycle, the US Federal Reserve is widely expected to deliver another rate hike within the year.

“It figured very slightly because the decision by the Fed this morning suggested a bit more dovish stance this year and a bit more hawkish stance next year. Maybe just one rate increase this year instead of two. And next year instead of a total of 100-basis points reduction, it looks like only 50 basis points reduction in the Fed funds target,” he said.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said a rate cut is possible as early as in the first quarter of next year if inflation reaches the BSP’s two to four percent target.

“Thus, the timeliness and size of any future local policy rate moves (pause or hike) would also be a function of the behavior of peso exchange rate, given its impact on import prices and overall inflation. So if the peso exchange rate is relatively stable, any future local policy rate adjustments would just match any future Fed rate moves (pause or hike) in the coming months of 2023,” Ricafort said.