Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla is confident the inflation-targetting central bank has enough arsenal to bring back the inflation path to within the target of two percent to four percent by September or October this year.
“We believe we have tools to keep inflation within target but of course we’re – just like any country -- not totally immune to very, very strong global forces,” said Medalla during the economic team’s Philippine Economic Briefing in London, United Kingdom, on Jan. 26.
However Medalla, an economist, said that “the thing that I’m really worried about is the period where we’re off-target”. But, he has been both confident and prudently cautious about signalling BSP’s actions and inflation outlook to the market. Based on the country’s inflation history, the longest number of consecutive months of above four percent inflation is 15 months.
As forward guidance goes, Medalla is considered more forthcoming than previous BSP governors before him. He has announced in December his preference to increase the benchmark rate by up to 50 basis points (bps) on Feb. 16 and March 23, the first two Monetary Board policy meetings for the year.
“Depending on what the US does, we probably have a few more adjustments,” he told investors in the London briefing. He did not mention this during the first leg the Europe-centric investor briefings in Germany, but he did say in Frankurt that he thinks the country’s high inflation will fall to below two percent by next year.
“We’ve done what we think we can to reanchor inflation expectations and the remaining ones, whatever is necessary to secure it,” said Medalla.
The BSP chief said the main scenario they are looking at, is that by September or October this year, inflation would have been already firmly within the target and normalized, barring any unforseen events, both domestic or global. Inflation is expected to revert to the the target range by the second half of 2023 at the earliest.
“(The inflation rate) will be within normal range by the last month of the third quarter or by early four quarter and that this will be closer to three (percent) than to four for next year,” said Medalla. “What could prevent this from materializing is global supply shocks. Another obvious one is really terrible weather that causes a large drop in harvests,” he added.
The country’s inflation is largely a supply-shock driven inflation. It started rising above the target in April last year as the Ukraine war which started on Feb. 28, 2022, impacted on both global and local prices. As inflation remained elevated, the BSP tightened its monetary policy to reanchor inflation expectations.
To ensure inflation falls below four percent this year, the BSP raised the policy rate by a combined 350 bps in 2022 and is poised to issue more rate hikes this quarter.
Medalla said the pressure to match US rate increases are lower compared to 2022, especially since the US dollar has weaken and the peso has appreciated back to the P54 level from its lowest exchange rate of P59 in October.
Meanwhile, with the signal of two pending rate hikes, the BSP policy rate could be in the six percent to 6.25 percent level by March. If the BSP increases the rate by 50 bps on Feb. 16, this will bring the interest rate to six percent from 5.5 percent.
The primary objective of the BSP's monetary policy is price stability that will be supportive of growth. The BSP first adopted the inflation targeting framework in 2002.
Inflation targeting is centered around achieving a low and stable inflation at all times.
The BSP has various tools to do this or monetary policy instruments. The reverse repurchase or the borrowing rate is the primary monetary policy instrument of the BSP, while other tools are open market operations, term deposits, the BSP securities facility, and other liquidity management facilities.