Bangko Sentral ng Pilipinas Governor Felipe Medalla said Tuesday monetary authorities successfully contained inflation and prevented the further depreciation of the peso against the US dollar through policy actions that included increases in interest rates.
Medalla said in a presentation during the Philippine Economic Briefing in Frankfurt, Germany the biggest challenge was the weakness of the peso which fell to an all-time low of 59.0 against the US dollar four times in October 2022.
The peso has recovered since then and closed at 54.43 against the greenback Tuesday.
“If you looked at the numbers from October, the depreciation was 13 percent. This [depreciation] was strengthening very high inflation, and the fall in exchange rate is starting to disanchor inflationary expectations,” Medalla said.
“Faced with these developments, we had an increase in policy rate of 350 basis points. I don’t own all of the 350 bps; 25 bps of that came from [Finance] Secretary Diokno when he was still [BSP] governor. The remaining 325 bps were all mine. So it [policy rate] is much higher than the neighbors,” he said.
“And as you can see, what happens later on is that depreciation [narrowed]. As the US dollar began to weaken, and as expectations of the Philippine central bank acting [to stem weakness in the peso] had its effect on the market, the peso actually began to appreciate,” he said.
Medalla also said BSP sold quite a bit of dollars from the reserves.
“As you can see, our reserves declined by $13.7 billion. It [the dollars sold] is about 12.6 percent of our reserves. The only countries that have bigger in relation to reserves [sold as a percentage of their gross international reserves] were India and Thailand,” he said.
“So the point is, we are very successful in bringing down inflation. We expect it [inflation] to go back [to within target]. It is already target-consistent at this point, but the year-on-year numbers will, of course, take time. The effects will] most likely [manifest] by the end of the third quarter or the fourth quarter of this year,” he said.
Inflation in December slightly accelerated to a more than 14-year high of 8.1 percent from 8 percent in November on faster increases in the prices of food and nonalcoholic beverages.
The December outturn was significantly faster than 3.1 percent in the same month in 2021. This brought the full-year average to 5.8 percent, beyond the government’s target range of 2 percent to 4 percent for the year and also faster than the average of 3.9 percent in 2021.
Medalla earlier said inflation likely peaked in December 2022. Medalla said there were uncertain events that could impact the annual increases in consumer prices for the month, such as what would happen outside of the country.
Medalla also did not rule out the possibility of more rate hikes this year.
The Monetary Board on Dec. 15, 2022 raised the benchmark interest rate by 50 basis points to a more than 14-year high of 5.5 percent to prevent the second-round effects of inflation. The interest rates on the overnight deposit and lending facilities were also set to 5.0 percent and 6.0 percent, respectively.
Medalla said the BSP’s latest baseline forecasts showed that average inflation was still projected to breach the upper end of the 2 percent to 4 percent target range for 2022 and 2023 at 5.8 percent and 4.5 percent, respectively.
The forecast for 2024 was adjusted to 2.8 percent on further easing of oil prices, peso appreciation and the slightly lower domestic growth outlook resulting in part from the BSP’s cumulative policy rate adjustments.