While in New York along with the Marcos administration’s economic team, Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla tried to assure US investors that the central bank will bring back inflation to within the target range by 2024, and vowed to temper peso depreciation.
Medalla said the peso, which depreciated to a new all-time low of P58.50 vis-à-vis the US dollar intraday on Thursday, is moving as expected with the rest of affected currencies around the globe.
“Relative to Korea (won), relative to the Japanese yen, to the (British) pound, the Philippine currency is middle of the pack,” he told foreign investors in the New York round of investor briefings. “If one takes a global a view the currency, it is actually quite stable, especially given this very difficult pivot of the US Fed,” said Medalla. The US Federal Reserve has been aggressively increasing its own interest rates by a series of 75 basis points (bps) to stave off price pressures and a possible recession.
With BSP busy managing an elevated inflation and intervening in the foreign exchange (FX) market to smoothen volatilities, the central bank chief said that since “we’ll be there for quite some time (high inflation regime)” they will engage all monetary policy tools to ensure inflation expectations will continue to be anchored to their inflation path.
“We’re confident that we will be able to navigate,” he said
The peso hit its lowest close on record at P58.49 on Sept. 22 which was the day the BSP raised the benchmark rate by another 50 bps at 4.25 percent. The BSP has lifted the key rate by a cumulative 225 bps since May 19.
Medalla reiterated in New York that he expects inflation to peak in September or October. The BSP’s nowcast indicate a higher September inflation rate compared to August’s 6.3 percent. Year-to-date, the country’s inflation stood at 4.9 percent, way above the government target of two percent to four percent. By end-2022, the BSP projects an inflation average of 5.6 percent.
Medalla is confident that by 2023, the inflation rate will be closer to three percent than four percent despite that the forecast average for next year is 4.1 percent.
By 2024, he said the inflation rate will likely settle back to within the target at three percent.
“We’re using three tools (to make this happen). We raise interest rates and we make sure the supply shocks do not (spiral). Increase the policy rate without choking growth, and the FX intervention as well as non-monetary measures,” said Medalla.
The BSP expects the country’s headline inflation to remain on the high side, or above the target during the first half of 2023.
The last five BSP rate hikes are expected to lead to a lower, more manageable inflation path over the medium term despite second-round effects such as wage and transport fare increases as a result of elevated oil and non-oil prices
Medalla said the inflation target remains at risk over the policy horizon because of “broadening price pressures” while elevated inflation expectations “highlight the risk of further second-round effects.” The depreciation of the peso vis-à-vis the US dollar is another upside risk to the inflation.
Upside risks continue to dominate the inflation outlook in the near term due to the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, the sharp increase in the price of sugar, as well as pending petitions for transport fare increases.
Downside risks are still the weaker-than-expected global economic recovery as well as the resurgence of local Covid-19 cases in the country.
The government’s economic team accompanied President Ferdinand R. Marcos Jr. in the US for his four-day official trip, mainly to take part in the United Nations General Assembly, meet with investors and to attract foreign direct investments to the Philippines.