BSP to focus on inflation, not US Fed – Medalla

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the next monetary policy meetings will focus more on ensuring that inflation will continue to decelerate rather than what the US Federal Reserve is doing.

In December last year and then again in January this year, Medalla already communicated to the market that there is less pressure to match US interest rates since the peso seems to have stabilized. At the closing trade last Feb. 4, the exchange rate was at the P53 level for the first time since June 2022, when the peso started its rapid depreciation due to a strong US dollar.

“Next meeting (we) will focus on inflationary expectations in PH (Philippines), not the Fed’s 25 bps rate increase,” Medalla told reporters on Viber Saturday, Feb. 4.

BSP Governor Felipe M. Medalla

The US Federal Open Market Committee on Feb. 1 raised its funds rate by 25 bps to 4.5 percent - 4.75 percent to battle its own inflation problems.

The BSP’s Monetary Board will have its first policy meeting for the year on Feb. 16, next week. The market expects the BSP to also increase the key rate by 25 bps which will bring the benchmark rate to 5.75 percent from 5.5 percent.

Medalla has signalled in December that they will likely raise the policy rate on Feb. 16 and March 23.

The BSP chief also reiterated that based on their consumer price index outlook, inflation has already peaked in December 2022 when it reached a 14-year high of 8.1 percent. It forecasts a January inflation range of 7.5 percent to 8.3 percent. The government will release its January inflation number on Tuesday, Feb. 7.

Last year, the BSP benchmark rate was raised by a cumulative 350 bps or from two percent to 5.5 percent, largely influenced by what is going on in the US Fed. The reverse repurchase or the borrowing rate is the primary monetary policy instrument of the BSP to control both liquidity and inflation. The BSP had no choice but to mirror US rate increases to protect the peso from excessive volatility which has started to affect inflation.

From its last policy-setting meeting which was Dec. 15, the BSP projected the 2023 inflation to average at 4.5 percent while it expects 2.8 percent in 2024.

The easing global oil and non-oil prices, negative base effects, and the impact of BSP’s rate adjustments in 2022 will ensure inflation path will decelerate in 2023 until 2024, said Medalla.

He also said recently that it is possible that by September or October this year, inflation would have been already firmed up within the two percent to four percent government target and “normalized” barring any unforeseen events, both domestic or global.

Medalla said inflation is expected to revert to the target range by the second half of 2023 at the earliest and could be below two percent in 2024.

He added that the pressure to match US rate hikes is lower compared to 2022, especially since the US dollar has weakened and the peso has recovered from its lowest exchange rate of P59 in October.

The BSP has kept a decent rate differential between US rates and central bank rates of 100 bps at least to balance inflation expectations and economic recovery, and to temper exchange rate pressures while at the same time ensuring growth momentum post-pandemic is intact.