The Bangko Sentral ng Pilipinas (BSP) has enough arsenal to manage high inflation, sustain a non-inflationary growth and ensure a strong banking system, according to BSP Governor Felipe M. Medalla.
Medalla said late Monday, May 22, after Fitch Ratings affirmed the Philippines’ investment-grade credit rating of “BBB” and revised the outlook to “stable” from “negative” that the central bank “remains committed to using the tools at its disposal to address the current challenges brought about by inflation and developments in the global banking system.”
The BSP highlighted Fitch’s statement on the credibility of its inflation-targeting framework and the flexible exchange rate policy.
It noted that BSP’s “interventions to mitigate peso volatility have been reversed” and that “monetary financing to the government during the pandemic was more limited and was reversed more quickly than in some peers.”
Fitch said it expects the country’s inflation to average to about four percent by 2024, or within the government target band of two percent to four percent. This is consistent with the BSP’s own forecast of 5.5 percent for 2023 and 2.8 percent for next year.
Further commenting on the Fitch upgrade, Medalla said the BSP’s “exceptional and timely actions which include aggressive monetary tightening and the previous temporary financing to the government during the pandemic, have not resulted in adverse side effects on the stability of the financial system.”
“With the Philippine banking sector being liquid and well-capitalized, the central bank stands ready to use all the tools at its disposal to preserve price stability,” he added.
The BSP has raised the benchmark rate by a cumulative 425 basis points in year-long tightening bias to prevent the peso from breaching past P60 in 2022. The rate hikes primarily were intended to control inflation and the exchange rate when the spot market has began to impact on inflation.
The Philippines has maintained the same investment-grade credit rating from Fitch since December 2017. Monday’s revision of the outlook to “stable” from “negative” is anchored on the country’s “strong and resilient economic growth, sound economic policy framework, and comfortable external payments position.”
The BSP adopted the inflation targeting framework in 2002. Since then, its policy toolkit includes interest rate adjustments, a flexible and market-determined exchange rate, and the use of foreign exchange reserves as first defense against external shocks.
The BSP reiterated Monday that it continues to supports the government’s targeted non-monetary interventions to curb price pressures.
Inflation has dropped to 6.6 percent in April, lower than March’s 7.6 percent and February’s 8.6 percent. Inflation is still above-target but it has been decelerating since February after hitting a peak of 8.7 percent in January. The year-to-date average is now 7.9 percent.
For now, exchange rate intervention and keeping the BSP policy rate at 6.25 percent in a hold position possibly until the third quarter are the two primary monetary policy measures that the central bank has done to stabilize the peso-US dollar rates, currently at the P55-56 level.
The key rate should at least be 100 bps higher than the US interest rates to keep the exchange rate less volatile. As of May 18, which was the last Monetary Board policy meeting, the BSP rate is paused at 6.25 percent after nine straight rate hikes.
Meanwhile, a “BBB” rating which is a notch above the minimum investment grade, means there is a low likelihood of a default risk, said the BSP. “It also means that the country’s current capacity for payment of financial commitments is considered adequate,” it added. As for the “stable” outlook, this means Fitch is not likely to change its rating over a one- to two-year period.
The Fitch upgrade also indicates that the country’s sovereign investment-grade rating has a lower credit risk. It means that instead of paying higher interest payments, the government can free up more funding for “socially beneficial programs and projects” and will have access to more financing from multilateral agencies. It will also be easier to attract attention from the international capital markets when selling global bonds.