Bangko Sentral ng Pilipinas Gov. Eli Remolona Jr. (PNA file photo)
MANILA – Risks from elevated inflation rate and external factors kept the Philippine monetary authorities on their toes in 2023.
And while the policymaking Monetary Board (MB) tightened further the Bangko Sentral ng Pilipinas’ (BSP) key rates to a 16-year high of 6.5 percent, with the hike this year alone at 100 basis points, monetary authorities said key rates are expected to be kept where it is for some time as inflation remains above target.
The rate of price increases slowed for the second consecutive month last November to 4.1 percent after reversing the downtrend last September when it accelerated to 6.1 percent due to faster upticks in food prices, among others.
It started the year at 8.7 percent, the highest since November 2008, largely due to upticks in housing rentals, food prices, and power rates, among others.
The government’s inflation target is a range between 2 and 4 percent until 2024.
Although the rate of price increases has started to decelerate, BSP Governor Eli Remolona Jr. said “we’re still not out of the woods when it comes to inflation.”
“If there are further supply shocks, it makes it all the harder,” he said, citing also the threat of a possible financial crisis due in part to elevated central bank key rates around the world.
Thus, the decision to keep key rates steady during the MB’s last rate-setting meeting last Dec. 15 and the decision to retain the current policy stance until signs of continued deceleration in the domestic inflation rate is firmly seen.
Strong domestic banking system
Fears for a financial crisis increased in the first quarter of this year after three small to mid-sized US banks were shut down due to liquidity issues.
BSP officials, however, assured the public that the Philippines’ banking system remains strong on sustained measures to ensure an adequate level of capitalization among domestic players.
Remolona said they remain on the lookout for any similar incidents since although the issue in the US has been “contained with a very impressive and very swift intervention this doesn’t mean there are no other banks that are also in trouble.”
“The next one might have contagion. So, we don't know. We're just trying to make sure. Our banks are resilient. I am trying to be ready for the worst,” he said.
Monetary policy and domestic growth
The hikes in BSP’s key rate have had some impact on domestic growth but monetary officials said they are not tightening rates without considering its effect on the economy.
“When we have to tighten monetary policy to bring inflation down, we try to do it in a way in which we don't tighten unnecessarily. We don't want to tighten so that it affects growth,” Remolona explained.
Growth, as measured by gross domestic product (GDP), expanded by 5.9 percent in the third quarter of this year, up from quarter-ago’s 4.3 percent but lower than year-ago’s 7.7 percent.
With a total of 100 basis points increase in its key rates, the BSP hiked the most among central banks in the region but Remolona said this is needed to ensure that they meet their mandate of price stability.
Higher key rates impact on consumers’ spending ability but monetary authorities have repeatedly stressed the need to keep the reins against further upticks in inflation otherwise more secondary effects, like salary and minimum fare hikes, will transpire.
This year, several regions implemented hikes in workers' minimum pay to help address the impact of elevated prices on people’s budgets.
Also, minimum fares in public utility vehicles were hiked by around PHP1 to cushion the impact of elevated oil prices on drivers’ and operators’ incomes.
Remolona said they expect inflation to further slow next year, although its movement is seen to be hampered by the impact of the dry spell.
“In our analysis, Q1 might be bad (but in) Q2 El Niño is 50/50. In our judgment, Q1 is likely, Q2 is more 50/50 (in terms of) supply shocks. We’re more or less anticipating,” he said.
With these forecasts, Remolona said changes in the key rates “is tricky.”
“Our forecast says it (inflation) will go below 3 percent in Q1 but for April-July, because of base effects, we’ll overshoot,” he said.
“But for the year as a whole, we hope we're within the target range. Closer to the ceiling, I think. Closer to the ceiling and the middle,” he said.
Remolona said “the base effects (of inflation) don’t affect the monetary stance.”
“But if inflation remains higher than we thought and expectations begin to get de-anchored, then we have to do more about inflation,” he said, but noted that if inflation continues to slow “then we will start to consider easing.”
The central bank chief said they consider the dry spell as a supply shock.
“The impact is very large and it will affect monetary policy, but if it's a small effect, we will tend to look through that supply shock,” he said.
Monetary authorities said El Niño’s impact on inflation is expected to be around 0.02 percentage points in the first half of next year.
They have said that although the hikes in BSP rates will have some impact on domestic growth, fiscal authorities are helping address this through higher government spending.
The government is firm on increasing infrastructure spending, among others, to ensure that growth will be sustained for a long time. (PNA)
