The Philippines central bank has policy flexibility given a resilient economy and stands ready to adjust interest rates to bring inflation back to target, its governor said on Thursday.
The Southeast Asian nation’s sound economy provided the central bank flexibility “to manoeuvre as it acts to bring inflation back to the target,” BangkoSentral ng Pilipinas (BSP) Governor Felipe Medalla said in a statement ahead of a Dec. 15 rate setting meeting.
Medalla told Reuters last month the BSP would have to raise rates in step with the US Federal Reserve, whose Chair Jerome Powell on Thursday said it could scale back the pace of its rate hikes “as soon as December”.
“The BSP stands ready to adjust its monetary policy settings,” Medalla said.
The Philippine economy grew by a stronger-than-expected 7.6 percent in the third quarter, backed by consumer spending.
The BSP, which has increased its benchmark interest rates by a cumulative 300 basis points since May to battle inflation, could hit pause on rate hikes by the first quarter next year barring “ no major shocks “, its governor said on Tuesday.
The interest rate on the BSP’s overnight reverse repurchase facility now stands at 5.0 percent, a half-percentage point lower than the 5.5 percent on December, 2008, at the height of the financial crisis that stemmed from global banks holding trillions of dollars of worthless investments in subprime mortgages.
The interest rates on the overnight deposit and lending facilities now stand at 4.5 percent and 5.5 percent, respectively.
Medalla said their latest baseline forecasts indicate a higher inflation path over the policy horizon, with average inflation breaching the upper end of the 2-4 percent target range in both 2022 and 2023 and possibly hitting 5.8 percent and 4.3 percent, respectively. The forecast for 2024 has also risen slightly to 3.1 percent.
Inflation climbed 7.7 percent in October, the fastest rise since December 2008, due mainly to the faster price increases of food commodities.
“The Board will continue to take all necessary action to bring inflation back within the target band over the medium term, in keeping with its primary mandate to sustain price and financial stability,” Medalla said.
In deciding to raise the policy interest rate anew, Medalla said the Monetary Board noted that core inflation has risen sharply in October, “indicating stronger pass- through of elevated food and energy prices as well as demand-side impulses on inflation.”
“At the same time, the risks to the inflation outlook lean strongly toward the upside until 2023 while remaining broadly balanced in 2024,” Medalla said.
He said upside risks are associated with elevated international food prices owing to higher fertilizer costs, trade restrictions, and adverse weather conditions.
On the domestic front, Medalla said the impact of weather disturbances on the prices of fruits and vegetables, supply disruptions in key food commodities such as sugar and meat, as well as pending petitions for transport fare hikes could also exert upward pressures on inflation.
“The impact of a weaker-than-expected global economic recovery, meanwhile, continues to be the main downside risk to the outlook,” Medalla said.
He explained that with the strong growth of the economy in the third quarter of 2022, domestic demand is seen to hold firm owing to improved employment outturns, investment activity, and consumer spending.
“On the other hand, a sizeable adjustment in the policy interest rate will help insulate the economy from external headwinds and exchange rate fluctuations that could further entrench price pressures and potentially dislodge inflation expectations,” Medalla said. —Jimmy Calapati, Reuters
