“BSP’s actions are anchored on what Medalla calls our three pillars: price stability, financial stability, and a safe and efficient payments and settlements system—these are the three pillars of central banking”
Bangko Sentral ng Pilipinas Governor Felipe Medalla vibered me yesterday.
He vowed: “Inflation will most likely be back to within our 2 to 4 percent target before the end of the fourth quarter of this year.”
Philippine headline inflation rose annually to its highest since 2008 to 8.1 percent in December 2022, from 8.0 percent in November 2022.
The November surge in prices was triggered by the 10 percent rise in food and beverage costs.
Reports ING: “Supply disruptions caused by two deadly storms pushed up vegetable prices. Meanwhile, both utilities and transport costs posted slightly slower price increases, tracking the moderation in global energy prices.”
Also driving inflation was strong demand side pressures with items related to so-called revenge spending reporting faster inflation.
“Restaurants and hotels (6.5 percent YoY from 5.7 percent) and personal care (4.2 percent YoY from 3.7 percent) the fifth straight month of accelerating inflation and with domestic demand resurgent, we could see this trend continuing into 2023,” says ING in an analysis.
This year, the BSP is likely to triple its interest rate from a record low 2 percent in February 2022 to 6 percent, or higher. The benchmark BSP rate was raised to 5.5 percent in December 2022.
Explains Philip Medalla: “Unfortunately, BSP’s policy rate changes can address only the second order effects of the supply shocks that caused the high inflation. We can prevent the increases in food and import prices from propagating further price increases of other goods and services, but the higher interest rates can’t bring down food prices.”
So there, prices of foods –including rice, corn, fish, pork, chicken, vegetables and anything edible—will remain elevated, to use a fancy word by economists.
At its meeting Dec. 15, 2022, the Monetary Board raised the interest rate on the BSP’s overnight reverse repurchase facility by 50 basis points to 5.5 percent, effective Dec.16, 2022.
Accordingly, the interest rates on the overnight deposit and lending facilities will be set to 5.0 percent and 6.0 percent, respectively.
The BSP’s latest forecasts baseline average inflation to breach the upper end of the 2-4 percent target range for 2022 at 5.8 percent and 2023 at 4.5 percent.
BSP said the forecast for 2024 fell to 2.8 percent owing mainly to the further easing in oil prices, peso appreciation, and the slightly lower domestic growth outlook resulting in part from the BSP’s cumulative policy rate adjustments.
The MB raised interest rates on Dec. 15, 2022 after noting the further uptick in headline and the sharp rise in core inflation in November amid pent-up demand.
“Moreover, upside risks continue to dominate the inflation outlook up to 2023 while remaining broadly balanced in 2024,” BSP said in a statement.
BSP said “the expected upside risks to inflation over the policy horizon stem mainly from elevated international food prices due to high fertilizer prices and supply chain constraints.”
On the domestic front, the BSP noted that trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare hikes, as well as potential wage adjustments in 2023 could push inflation upwards.
Meanwhile, the impact of a weaker-than-expected global economic recovery continues to be the primary downside risk to the outlook.
Amid broad-based inflation pressures, persistent upside risks to inflation, and elevated inflation expectations, the Monetary Board deems it necessary to take aggressive monetary action to bring headline inflation back to within target as soon as possible.
At the same time, an adjustment in the policy interest rate will continue to provide a cushion against external spillovers amid tighter global financial conditions.
The BSP said it remains steadfast in its commitment to its primary mandate of sustaining price and financial stability and stands ready to take all necessary action to bring inflation to within the 2-4 percent government target band over the medium term.
Governor Medalla has indicated his preference to maintain a 100 basis-point (one percentage point) differential with the Fed rate.
Analysts see the BSP chief matching one on one any Fed rate increases.
Still, Medalla hopes inflation will moderate middle of 2023 and on to 2024. Then, he can start reversing rate increases, but gradually.
Medalla knows fully well he is in the hot seat.
“This may be the most difficult time since I joined the Monetary Board more than a decade ago,” he told economic journalists in November.
He frets: “We are facing very difficult challenges. There is the very aggressive response of the US Fed [US Federal Reserve].
“Then, we also have the Ukraine-Russia conflict, which along with domestic supply issues, pushed up the prices of oil and non-oil commodities. This has pushed inflation to the center of mainstream consciousness.”
“These challenges are indeed tough,” Medalla concedes, “but the Philippines will pull through. We have done so in past crises, and we will do it again.”
BSP’s actions are anchored on what Medalla calls our three pillars: price stability, financial stability, and a safe and efficient payments and settlements system—these are the three pillars of central banking.
On price stability, as an inflation-targeting central bank, “we aim to bring inflation back to the government’s target range over the medium term,” he insists, adding,
“we expect inflation to ease from the projected 5.6 percent in 2022 to 4.1 percent in 2023, and further to 3.0 percent in 2024.”
“We are prepared to match the US Fed,” Medalla says.
If the US Fed raises interest rates by another 75 basis points, “you can expect that I will be voting to raise the policy rate by a similar magnitude.”
The reason: “To increase the likelihood that headline inflation will be within target by the second half of next year and, hopefully, for the rest of 2024,” Medalla explains.
He says “the BSP’s policy rate hikes will prevent a significant narrowing of the interest rate differential between the US and the Philippines. Keeping a comfortable differential between our policy rate and that of the US lends support to the peso.”
“The BSP observes a flexible exchange rate policy. As such, we do not target a specific exchange rate nor set a specific line in the sand,” explains the BSP chief.
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