Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla has signalled on Wednesday, Aug. 17, of further tightening of the monetary policy stance in the next meetings and hinted the possibility of more rate hikes until 2023.
More policy rate increases will ensure the BSP would be able to re-anchor inflation expectations and bring it down to below four percent next year and three percent in 2024.
“Exactly how many rate hikes that will require, it’s hard to forecast because a lot of the things that drive inflation may subside,” Medalla told reporters a day before the Monetary Board meets on Thursday, Aug. 18, to adjust the benchmark rate possibly by 50 basis points (bps).
The BSP chief said he will “not rule them out,” referring to rate hikes in the remaining meetings this year. After Aug. 18, other policy rate meetings will be held on Sept. 22, Nov. 17 and Dec. 15.
Medalla said every Monetary Board policy meeting from here on out, is always a possible zero or 25 bps adjusment. “Or even a 50 (bps),” he said.
“It will depend on the situation. It’s very hard to say what we will do next year because our own experience is that error forecast becomes (or) the variation of standard deviation of the forecast is wider and wider,” he told members of the Economic Journalists Association of the Philippines (EJAP) during the hybrid 2022 EJAP-SMC Economic Forum on Wednesday.
Medalla noted that what drives inflation are shocks that happen to three to seven months later. “By their very nature, whether (these are) prices of imports, they are very difficult to forecast. That’s the nature of the beast in inflation forecasting. And, that’s why we don’t really want to forecast beyond two years. In fact, personally I think any forecast beyond 18 months is not very useful,” he said.
Medalla also observed, and he agrees with Socioeconomic Planning Secretary Arsenio M. Balisacan who is also a speaker in the forum, that the correlation between Philippine growth and global growth has been reduced.
“The reason for that is we are more reliant on BPO (business process outsourcing) and remittances, and at the same time we import a lot of food and we import our fuels. If those factors work in our direction, and food supply improves, petroleum prices fall, then we will need more rate hikes after tomorrow (Aug. 18). But, I think one has to be quite lucky for that to happen,” he said.
During his presentation in the forum, Medalla stressed that the latest inflation prints, which was 6.4 percent in July, has led to “intensifying inflation pressures” while second round effects to inflation have emerged such as wage increases and transport fare hikes resulting from elevated oil and food prices.
Since May 19, the Monetary Board has raised the policy rate by 125 bps. Its initial lift off were two 25 bps rate hikes last May and on June 23, followed by an off-cycle 75 bps last July 14.
Other than the July inflation rate, the BSP will also take into consideration the lower-than-exected GDP growth of 7.4 percent in the second quarter.
As of June 23, the BSP’s average inflation forecast for 2022 is five percent, 4.2 percent for 2023 and 3.3 percent in 2024.
The BSP is expected to revise lower the 4.2 percent 2023 forecast on Thursday, and eyeing at least a flat three percent average inflation for 2024.