Just three days before the June 22 policy meeting, Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said there are enough reasons to continue to pause and keep the benchmark rate at 6.25 percent. Medalla said the inflation path is on the downtrend and this is “a good enough reason to pause” on Thursday. This will be the second Monetary Board policy meeting that BSP will maintain current key rates, the first was last May 18 after nine cycles of rate hikes. The BSP chief reiterated that inflation is clearly declining and on a gradual downward trend until 2024. He also said that his earlier announcement that inflation will fall below four percent by September or October is still intact. Medalla’s only concern is the market perception of the interest rate differential between the BSP rate and US Federal Reserve rate and its effect on the exchange rate. The Fed rates are also currently on a pause and hold stance, but the US interest rates are still on the hawkish side, meaning it could be raised any time. The BSP has been maintaining a 100 to 125 basis points (bps) interest rate differential with a BSP rate at 6.25 percent and the US Fed rate at 5.25 percent. Medalla said the market is used to a 200 bps interest rate differential and anything lower than that is viewed as a “signal for a weaker peso” and this “may not be a good thing at this point because inflation is still a problem.” “This time therefore we have to be conscious about interest rate differentials but that is not the main driver. The main driver is inflation,” he told reporters on the sidelines of a Bank of the Philippine Islands event on Monday, June 19. For some weeks now, the peso has been relatively stable at the P55 to P56 level versus the US dollar. The peso has stabilized somewhat after the BSP raised the policy rate by a cumulative 425 bps. Medalla said the market should not have a default reaction that the peso will depreciate when the interest rate differential falls below what they expect it to be. “This can become self-fulfilling prophesies. If the interest rate differential gets a little bit narrower, that’s not necessary a reason for the peso to depreciate,” he said. Meanwhile, Medalla said that as they monitor US Fed movements, they cannot rule out future rate increases and he thinks the market is too optimistic in anticipating a rate cut will come soon. “If you look at yield curves, the assumption is a cut is coming soon. But if we listen to US Fed officials, that’s not the case,” he said, in some parts in Filipino. The BSP has recently communicated that it is more confident that inflation will drop to below four percent as early as September this year after the consumer price index (CPI) declined for the fourth straight month in a row. May inflation eased to 6.1 percent versus 6.6 percent in April. However, the year-to-date CPI is still elevated at 7.5 percent versus an inflation target of two percent to four percent. During the Monetary Board’s most recent policy meeting on May 18, the BSP decided for a “prudent” pause to allow it some time to review markets’ conditions after the aggressive rate hikes, especially asset prices. The interest rates on the overnight deposit and lending facilities were also left unchanged at 5.75 percent and 6.75 percent, respectively. Medalla said they could maintain a hold stance for two to three more Monetary Board policy meetings before taking further action. The implication is the pause will last until August or September this year. The BSP currently forecasts 2023 average inflation of 5.5 percent and 2.8 percent for 2024. The BSP expects inflation will average at 7.2 percent in the first half of this year, 4.6 percent by the third quarter and three percent by the fourth quarter. The central also thinks inflation will be firmly within the target range by the first quarter of 2024 due to negative base effects and expected decline in oil and non-oil prices.