Bangko Sentral ng Pilipinas Governor Felipe Medalla said Friday that an inflation rate below 3 percent will likely give monetary authorities a reason to cut interest rates by January or February 2024.
Medalla said in an interview on Bloomberg TV that waiting remained the “best strategy” at the moment.
“I suppose if we see inflation below 3 percent, by January or February we may cut. But we should be patient. We must be careful. Waiting is the best strategy now. The optimal waiting time is up to January or February [2024],” he said.
Medalla said there was a need to watch the movements of other central banks, but local monetary authorities depend on domestic economic data such as inflation.
“We are confident that we have done enough.. Headline inflation [in May 2023] stood at 6.1 percent. Unless there are new ‘surprises,’ we expect inflation below 4 percent by October or November [2023],” he said.
“The [current] situation will last quite some time unless there is other data that says otherwise. Goods inflation is actually lower than 4 percent, but services inflation is higher than 4 percent. So there is little reason to raise and little reason to cut [interest] rates,” he said.
Bank of the Philippine Islands lead economist Jun Neri said in an online briefing Friday that inflation in the Philippines could be within the target range sooner than in the United States.
“The BSP may soon have the opening [to cut interest rates]. The BSP may do it gradually,” Neri said.
Neri said inflation would not only be the main consideration by monetary authorities when it comes to cutting interest rates. He said they were also looking at interest rate differentials.
“Based on the assessment of our research team, the best time to cut interest rates is early 2024,” Neri said.
The Monetary Board of the BSP on Thursday maintained the benchmark policy interest rate at 6.25 percent as expected as inflation began to ease.
Medalla said the average inflation was projected to settle at 5.4 percent in 2023, slightly lower than a previous estimate of 5.5 percent. The BSP also forecasts an average inflation of 2.9 percent for 2024 and 3.2 percent for 2025.
Medalla said the balance of risks to the inflation outlook continued to lean towards the upside due to the potential impact of additional transport fare increases and minimum wage adjustments, persistent supply constraints of key food items, El Niño weather conditions and possible knock-on effects of higher toll rates on agricultural prices.
He said while the domestic growth momentum was expected to remain intact over the near term, recent demand indicators suggested a likely moderation in economic activity over the policy horizon, reflecting the impact of the BSP’s cumulative policy rate adjustments as well as weak global growth prospects.
Given these considerations, the Monetary Board deemed it appropriate to maintain current monetary policy settings to allow the BSP to further assess how inflation and domestic demand have responded to tighter monetary conditions, he said.