Bangko Sentral ng Pilipinas Governor Eli Remolona said Friday there is still room for local monetary authorities to increase the prevailing interest rates, if needed, without leading to economic contraction.
Remolona said in an interview with CNBC the third pause of the Monetary Board on Thursday was a “prudent” move, but the BSP remained ready to hike if the upside risks materialized.
He said the softness in the second-quarter GDP growth of 4.3 percent, a slowdown from 6.4 percent in the second quarter, could be brought about by several factors, but he expected some recovery in the third quarter.
“But I think we have room to hike without contracting the economy… The neutral rate of interest is closer to 4 percent in real terms. If our projections are right, we will be at 3.25 percent in real terms for neutral interest rates .. but we have room to hike,” he said.
“We think we will be within the striking distance of the target range. We think we will be within the target range by the end of this year and certainly by 2024 and 2025. That is the way we are looking at this,” he said.
Data from the Philippine Statistics Authority showed that from a peak of 8.7 percent in January 2023, inflation eased to a 16-month low of 4.7 percent in July.
The BSP has so far raised the policy rates by 425 basis points to 6.25 percent from May 2022 until March 2023, before taking a prudent pause in the last three Monetary Board meetings, including Thursday’s, amid the sustained easing of inflation.
Remolona said earlier the latest baseline projections continued to show a return to inflation target in the fourth quarter of 2023 despite a generally higher path for inflation relative to the previous forecast from the monetary policy meeting in June, reflecting mainly the impact of higher international oil prices.
Inflation is seen to average 5.6 percent in 2023, 3.3 percent in 2024 and 3.4 percent in 2025. Inflation expectations for 2023 remained steady, while those for 2024 and 2025 declined slightly.
Remolona said the balance of risks to the inflation forecast continued to lean towards the upside. Potential price pressures are linked to the impact of possible higher transport charges; higher minimum wage adjustments; persistent supply constraints on key food items; and the effects of El Niño weather conditions on food prices and power rates, he said.
BMI, a unit of Fitch Solutions, said the BSP might be keeping the key interest rates until the early part of 2024, especially with the onset of the El Nino weather condition that could pose inflationary pressures going forward.
“The onset of El-Niño weather conditions, which is projected to intensify from Q423 to Q124 could threaten food prices, potentially raising concerns of Philippine disinflationary process,” BMI said.
It said its commodity team ranked the Philippines sixth in its Southeast Asia El-Niño Exposure Index.
BMI said maintaining currency stability would be a key consideration in the BSP’s near-term policy decisions. The Philippine peso depreciated by about 1.9 percent against the US dollar this year and is currently trending towards a one-year low of P59.47 a dollar.
“Policymakers will be cautious about exacerbating further weakness in the peso, especially given that the US Federal Reserve has not completely closed the door on further tightening—a key risk that we have been highlighting,” it said.
BMI said these factors would prompt the BSP to keep interest rates at multi-year highs, adding this would come at the expense of growth.
“We have recently knocked down our 2023 growth forecast from 5.9 percent to 5.3 percent in light of a poor economic performance in Q2. Rate cuts would then only be considered when food prices have stabilized and major central banks have begun their easing cycle, which we expect in Q224,” it said.
