Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona said the BSP is more likely to hike rather than cut policy rates as the country's inflation level still remains elevated with dominant upside risks, including the potential threat of the peso sliding again.
Photo Insert: The new BSP chief said that for now, inflation expectations have been anchored to a range of between two and four percent.
“For now, we’re contemplating whether to hike or not to hike. We’re not thinking about whether to cut or not to cut. It’s more on the tightening side,” he said on Bloomberg TV in Canada last Saturday but the interview was only released Monday.
Remolona said he is not sure if the BSP has “done enough” to fight inflation which as of end-June was averaging at 7.2 percent, way above the two percent to four percent government target.
“We will be maybe well into the target range before we consider anything like a rate cut and it will depend on how weak the economy is or how strong the economy is,” he said. At this point, Remolona said it is “premature to talk about a rate cut because the economy is still very strong and inflation is still above our target range.”
The BSP expects GDP to grow by six to seven percent this year. The new BSP chief said that for now, inflation expectations have been anchored to a range of between two and four percent. “That’s good news for us,” he said.
Remolona, who once worked for the Federal Reserve of New York, said the US Federal Reserve will probably decide to pause this month when it meets on July 25 to 26 because the last US inflation number was “very good” and they do not have to “tighten anymore (and) it’s going to pause for a while.”
“The tricky thing is that the Fed meets on July 25-26 and then BSP meets three weeks later. Three weeks is an eternity for financial markets. If the difference between the policy rate of the Fed and our policy rate becomes too wide, it (will) make some market participants feel uneasy and they may retreat from the peso. Usually, small movements in the peso are okay, it doesn’t worry us. But sometimes, it’s a sharp movement and it begins to affect expectations, and we begin to worry,” he said.
At the moment, the exchange rate is stable at P54 vis-à-vis the US dollar.
Known as a global central banker, Remolona said the US Fed will have to hike rates but not soon. “What might happen is – and this won’t happen very soon -- but with the Fed in hiking mode, global financial conditions might tighten and then there might be a global recession. Then, we will have to consider a rate cut just to protect ourselves from a global recession,” he said.
The BSP’s Monetary Board will hold its next policy meeting on Aug. 17. To calm the markets, Remolona said, they will issue forward guidance at least two weeks before the policy meeting.
“It won’t be accompanied by a policy rate move, but we try to calm the markets and we’ll see in three weeks (after the US Fed meeting) what we should do, it depends a lot on what data we see,” he said.
A US rate hike, however, will have an impact on the exchange rate and if it’s a sharp movement “we’ll have to respond in some way,” said Remolona.
When asked what is a sharp movement for the peso, the BSP chief said this will depend on the market narrative that caused the movement to begin with. “If the narrative doesn’t make sense then we have to be more decisive in responding to it,” he said.
The BSP's key rate or its overnight reverse repurchase (RRP) rate is currently at 6.25 percent. It has paused in the past two meetings in a row with slowing inflation. For nine straight meetings in 2022 until early this year, the BSP has raised the RRP rate by a cumulative 425 basis points.