Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said Monday, May 27, that they may have finally subdued inflation after facing “unusual” and large supply shocks in the last two years.
“I think we’re now beginning to tame inflation from a peak of 8.7 percent in January 2023 to the April number that has come down to 3.8 percent which is within our target range,” Remolona said during the Philippine Economic Briefing (PEB) Monday with the theme “PH On-the-Go: Fast-Tracking Economic Progress”. Remolona, who is overseas for an official BSP-related trip, delivered his welcome remarks via video feed.
Taking his place during the forum, Senior Assistant Governor Illuminada T. Sicat said the BSP has been successfully managing inflation which “is a very good thing to achieve because if we are able to manage inflation we can bring down interest rate and by bringing down interest rate we can spur economic activity and followed by increase in employment.”
She noted that based on the BSP inflation forecast, they see that inflation will be within the target range of two percent to four percent within the year and in 2025 despite upside risks. But “given that upside risks, the BSP has decided to sufficiently maintain a restrictive policy stance in order to ensure that we anchor inflation expectation so it will not result to second round effects.” The BSP policy rate has been unchanged at 6.5 percent since October 2023.
The BSP is anticipating a higher inflation rate for the month of May to July but “thereafter the central bank is projecting inflation will fall back to within the target band,” said Sicat.
“BSP must be very careful not to bring down interest rate too early or else we may not be able to address some of the upside risks that we are seeing in the future. But eventually once all these actions of the BSP, together with the non-monetary policy of the National Government in addressing the supply side, we will be able to bring back inflation to the target range for 2024 and 2025,” she added.
During the PEB forum, IMF Representative to the Philippines Ragnar Gudmundsson placed emphasis on the upside risks to the inflation outlook. “These upside risks stem from geopolitical tensions, from higher commodity prices internationally and also domestically from some demands for higher wages in particular,” he said.
Gudmundsson said the IMF’s view is that the BSP “should probably maintain a sufficiently restrictive monetary policy stance until we’re really firmly within the BSP target band.”
He also emphasized closely watching the US Federal Reserve actions although the BSP thinks its impact will only be temporary.
“What the Fed decides is important because interest rate differentials have a potential impact on capital outflows and a higher policy rate in the US affects the decisions of investors,” said the IMF official.
He added that “if there are capital outflows this can translate into pressure on the currency (and currency depreciation pressures) can have an impact on the current account deficit through the higher costs of imports.”
“Most important for the Philippines is to address the volatility caused by the Fed’s shifting stance by focusing on really ensuring that inflation expectations in the Philippines remain well anchored,” he said.
Gudmundsson also talked about foreign exchange or FX flexibility and how BSP should prioritize this to buck external-side pressures.
“Now is actually a more appropriate time than ever to allow more FX flexibility than targeting a more stable exchange rate,” he said. The peso has depreciated past P58 vis-à-vis the US dollar in recent days.
He said a country’s FX flexibility is its best first line of defense against external shocks.
“It’s the combination of foreign exchange flexibility with a credible inflation targeting regime that really matters, and to anchor expectations of investors. And what we’ve seen in the Philippines in recent years is that this combination of FX flexibility and a credible inflation targeting regime has been key in contributing to the perceived soundness of the Philippines’ macroeconomic policies,” said the IMF official.