February 4, 2023

Filipino Guardian

Sentinels of Filipino Free Press

GNP signals further tightening in 2023

MOTORISTS drive past the Christmas lights along Jose Abad Santos Avenue in San Fernando, Pampanga November 7. The Philippine economy is expected to grow by 6-7% in 2023. – PHILIPPINE STAR / MIGUEL DE GUZMAN

By Keisha B. Ta-asan, reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) signaled further tightening in 2023 as it aims to bring inflation close to 3% by Q3.

“Our goal is to have inflation between 2-4% by the third quarter of next year, better at 3% rather than 4%, and then the fourth quarter of 2024 will be like that too. That’s our goal,” BSP Gov. Felipe M. Medalla told reporters Tuesday.

National inflation accelerated to a 14-year high of 8% in November, bringing the full year average to 5.6%. This is lower than full-year GNP forecast of 5.8% but well above their target of 2-4%.

Mr Medalla previously said there could be rate hikes at the first two Monetary Board (MB) meetings in 2023. The schedule of MB meetings for 2023 has yet to be published.

Asked if the MB would hike rates further next year, Mr Medalla said a pause in the tightening cycle was unlikely after the first two meetings next year.

“I’d say we’re data dependent but sure… you can’t rule out the possibility of zero rate hikes after two meetings next year. But given the nature of surprises, you can never say never,” he said in a mixture of Tagalog and English.

“So, I think it’s safe to say that the final interest rate is higher than what we have now. How much higher, we don’t know,” he said, adding that the final interest rate could be 6% by the end of 2023.

BSP raised borrowing costs by 50 basis points (bps) to 5.5% last week, taking the policy rate to its highest level since November 2008 when it was 6%.

Since May, the Monetary Board has hiked rates by a total of 350 basis points.

According to Mr. Medalla, the current BSP policy rate is already “quite high”.

He also said the BSP could consider smaller rate hikes next year, noting that the probability of rate hikes by 25 or 50 basis points is higher at the next two policy meetings.

However, there are many uncertainties, Mr Medalla said, and these will influence the BSP’s future policy decisions.

“Who could have predicted that the Fed would have four 75 (bps) three months ago? When it comes to forecasts, you always have to be prepared for anything. That’s why we always say we’re very data dependent,” he added.

The US Federal Reserve raised interest rates by 425 basis points, bringing the policy rate to 4.25-4.5%.

When asked if the dollar was weakening against the peso, Mr Medalla said it was not surprising given the pace of interest rate hikes by the US Federal Reserve was slowing.

This as the Philippine peso closed at P55.24 against the US dollar on Tuesday, up 17 centavos from Monday’s close of P55.41.

Year to date, the peso has weakened 8.3%, or P4.24, from its close of P51 per dollar on December 31, 2021.

Meanwhile, the BSP could consider cutting banks’ reserve requirement ratio (RRR) by June next year if inflation slows as forecast.

“We don’t want to confuse the markets. We don’t want to raise interest rates and lower the RRR,” said Mr. Medalla.

“In reality, we should be able to do that because all we have to do is borrow more to offset the liquidity cost of the RR cut. But in order not to confuse the market, it has to wait until we are no longer in a bullish mode,” he said.

If there are signs that inflation will fall below 4%, Medalla says there could be a cut in the RRR before the end of June.

The BSP had previously committed to reducing the RRR of major banks to single digits by 2023.

The RRR for big banks is currently 12%, one of the highest in the region. The reserve requirements for thrift and rural lenders are 3% and 2%, respectively.