Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. again reassures the market that the hawkish BSP will not, and did not, tighten too much, and that the current 6.5 percent benchmark rate is still an appropriate monetary policy stance to ensure growth is not inflationary.
In his first public appearance of the new year, the BSP chief on Thursday, Jan. 4, said there remains challenges such as upside risks to inflation that they need to watch out for, but he is hoping – and this is based on their forecasting models – that the country’s consumer price index (CPI) will keep within the two percent to four percent target range for most of 2024.
The November CPI has dropped to 4.1 percent. The BSP is hoping the December CPI will be below four percent.
The BSP’s forecast for December inflation is 3.6 percent to 4.4 percent. The government will announce the end-2023 CPI on Jan. 5. As of end-November, the year-to-date average for inflation is above-target still at 6.2 percent.
Meanwhile, Remolona reiterated that the BSP, as an inflation-targeting central bank, has an effective way of balancing inflation which should be “low and stable” and economic expansion.
“People say we’ve been tightening too much … that’s a very difficult challenge because we want to make sure that we don’t tighten unnecessarily,” he said, adding that “we don’t want to cause a loss of output that’s not necessary.”
“Now, sometimes we make a mistake, and we tighten too much. But even when we make a mistake and we tighten too much, that also amounts to (effects) that’s temporary,” he also assured.
Remolona said the target reverse repurchase (RRP) rate or the key lending rate of 6.5 percent is “the right amount”. He has said in the past, and he said this again on Thursday, that the country’s economic activity growth is still the highest growth rate within the fastest-growing region in the world.
“That’s not so bad. There are more and more jobs. So in terms of growth, in terms of employment, we seem to be managing reasonably well in the face of supply shocks,” he stressed.
Remolona said in late December that he expects strong growth for the fourth quarter 2023, which the BSP expects will be around 5.9 percent, the same as in the third quarter gross domestic product (GDP) growth.
Remolona has always said that BSP’s tightening bias or hawkish stance has not derailed the growth momentum, that the 450 basis points (bps) cumulative increase to the policy rate has not affected the country’s economic expansion.
In fact, for the first six months of 2024, he also expects “stronger than now (GDP)” performance.
The 5.9 percent third quarter growth is the strongest growth posted among economies in Asia during the period.
Year-to-date, the economy has expanded by 5.5 percent, still below the government’s recently revised six percent to 6.5 percent growth assumption for this year.
To achieve the lower end of the growth assumption, the GDP has to grow by at least by 7.2 percent in the fourth quarter.
Based on the BSP’s November 2023 Monetary Policy Report (MPR), it said the country’s growth prospects remain intact for 2023 to 2025 despite global headwinds and tighter financial conditions.
However, it also noted that GDP growth could settle below government targets for 2023 and for 2024 and 2025.
“The estimated growth path reflects primarily the impact of subdued global economic conditions as well as the lagged impact of the policy rate adjustments. Nevertheless, the full-year growth forecasts for 2023 to 2025 have been adjusted upwards from the previous MPR, reflecting largely the faster-than-expected growth outturn in Q3 2023, supported by consumer and government spending and by higher growth nowcast for Q4 2023,” according to the BSP.
It added the growth prospects could still be offset partly by the impact of higher real policy rate as well as the estimated impact on agriculture of El Niño weather conditions.
“The economy is projected to operate slightly above potential output in 2023.The BSP’s forecasts indicate the output gap will fall slightly in negative territory in 2024-2025 from a small positive figure in 2023,” noted the BSP.
It further noted that the projected gradual decline in the output gap “reflects the impact of BSP policy interest rate adjustments on consumption and investment, decline in real income given high inflation and fiscal consolidation, and the projected slowdown in global growth affecting external trade.”
“Meanwhile, improving labor conditions, productivity recovery, and rising investments could support a higher potential output growth path,” it added.
On Dec. 14, 2023, which was the last monetary policy meeting of the Monetary Board, the BSP kept the policy rate steady and unchanged. A steady policy rate will allow previous policy interest rate adjustments, including the interest rate increase in October, to continue to work their way through the economy, said the BSP.
“Credit growth has continued to slow down. The pass-through to short-term market rates have been fully transmitted although interest rates of various consumer loans have yet to reflect the complete pass through from policy rate increases,” added the BSP.
As for inflation, the BSP expects inflation to hit six percent at end-2023 based on its latest risk-adjusted forecast. For this year, the forecast is 4.2 percent and 3.4 percent for 2025.
The BSP’s three-year medium term inflation forecast range is two percent to four percent target. This consistent with BSP’s “forward-looking approach to monetary policy formulation to keep inflation expectations anchored to the inflation target.”
The BSP said that “given the current structure of the Philippine economy, recent economic developments, and the overall macroeconomic outlook over the next few years” the existing target range remains appropriate.