By Katherine K. Chan, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) has opened its door to a more aggressive monetary policy path to curb inflation as persistent shocks stemming from the Middle East conflict continue to feed into consumer prices.
In an exclusive interview on One News’ Money Talks with Cathy Yang on Thursday, BSP Governor Eli M. Remolona, Jr. said the Monetary Board is considering a second straight rate hike before its June 18 meeting.
Asked about the likelihood of off-cycle tightening, Mr. Remolona said: “I wouldn’t say likely. We’re considering it.”
However, the central bank chief noted that they may also wait until the May inflation report comes out on June 5 before delivering the next monetary policy decision.
“That’s very close to the next scheduled policy meeting. So, at this point, it’s a toss-up whether we do an off-cycle or we just wait for the regular meeting, which is not that far away anyway,” Mr. Remolona said.
Mr. Remolona also acknowledged the emerging stagflation risks, with slowing economic growth and accelerating inflation, but said the BSP is banking on fiscal policy to help the economy recover as it seeks to maximize its monetary policy tools for inflation-targeting.
The BSP reversed its policy path at its April 23 meeting, starting a new tightening cycle as it delivered its first 25-basis-point increase in over two years to bring the key policy rate to 4.5%.
Central bank officials have said that their latest move was aimed at preventing broader second-round effects of inflation, keeping inflation expectations anchored and steering it back to their target as the prolonged Middle East war dimmed the growth outlook.
However, despite the preemptive rate hike last month, inflation has accelerated faster than expected, raising the risk that the BSP could fall behind the curve, according to Mr. Remolona.
“Ordinarily, a supply shock, you would look through it because it would go away and then you’re back to where you are. But now this is a big supply shock and it’s a persistent supply shock,” he said. “So, we have to react and we have to react aggressively, I think, in this kind of situation. That’s why we raised rates early.”
Inflation has breached the BSP’s 2%-4% target and monthly forecasts since the war erupted in late February.
In April, rising costs of food and utilities amid elevated oil prices drove the headline print to an over three-year high of 7.2% from 4.1% in March and 1.4% last year. This was past the BSP’s 5.6%-6.4% estimate for the month.
Asked if they are now behind the curve, Mr. Remolona said: “There’s a risk that we are. It depends on whether the supply shock persists.”
He noted that they fell short of anticipating the rapid impact of the oil supply shock on other items in the consumer basket such as fertilizer and rice, as the cost of those items typically takes time to rise.
Mr. Remolona said the BSP is closely monitoring transport fares, which he said were “adjusted very quickly,” as well as faster inflation for the bottom 30% of households.
The central bank governor also noted that the slowdown in consumer spending has helped ease inflation but added that they do not want to address increasing price pressures that way.
“The slowdown in consumer spending helps lower inflation. We don’t want to lower inflation that way. We want consumer spending to resume and then it’s our job to keep inflation low,” Mr. Remolona said, adding that they expect consumer spending to recover.
The central bank projects inflation to hover above 5% for most of the year to average 6.3%, faster than its 5.1% forecast before the war. By 2027, it expects inflation to cool down to 4.3%.
Meanwhile, Mr. Remolona said the BSP can probably tolerate the peso hitting P63.50 to the dollar as long as it is in a “measured” way which would not stoke inflation.
“We worry about it to the extent that it worsens inflation,” he said. “At the same time, a peso that’s weaker helps our exports. Our exports do need help because we’re facing a current account deficit. So, we can’t allow this kind of deficit to persist forever, and a weaker peso helps narrow the gap. But we’re not trying to seek a level for the peso.”
The central bank, according to Mr. Remolona, also remains “active as usual” in the foreign exchange market to smoothen out sharp swings amid recent episodes of the peso plunging to back-to-back historic lows.
The local unit closed at its historic low level of P61.75 against the dollar for two straight trading days this week as lingering market uncertainty from the still-waging war in the Middle East prompted safe-haven demand for the greenback.
However, it gained 15.90 centavos on Thursday to close at P61.581 per dollar from its P61.74 finish on Wednesday.
