The Bangko Sentral ng Pilipinas (BSP) considers it “dangerous” to cut interest rates faster than a policy easing by the US Federal Reserve.
Felipe Medalla, BSP governor, yesterday said while inflation will decelerate to below 4 percent late this year and come in closer to 3 percent in 2024, “the BSP aims to maintain its interest rate differential with the Fed.”
“If inflation in the US is sticky and cuts are slow, it is very dangerous for the Philippine central bank to cut faster than the US,” Medalla said.
Inflation dropped to 7.6 percent year-on-year in March from 8.6 percent in February.
The resulting year-to-date average of 8.3 percent is above the government’s average inflation target range of 2 to 4 percent for the year.
In contrast, core inflation, which excludes selected volatile food and energy items to depict underlying demand-side price pressures, rose further to 8 percent in March from 7.8 percent in February.
On a month-on-month seasonally adjusted basis, inflation was nil in March from 0.3 percent in the previous month.
Gross domestic product could have expanded “in the neighborhood of 6 percent” in the first quarter, Medalla said.
A government inter-agency panel this week maintained its economic growth target of 6 to 7 percent this year on robust domestic economic activity amid global headwinds.
Tempered inflation in April puts monetary authorities in a position to pause policy, Medalla said, adding that the inflation average for 2023 will be revised downwards from the 6 percent projection.
The policymaking Monetary Board next meets on May 18 to set the benchmark interest rate which it has raised by 425 basis points (bps) since last year to 6.25 percent.
The BSP was Asia’s most aggressive central bank in raising interest rates to combat elevated inflation and keep up with the US Federal Reserve’s tightening cycle.
Medalla said the latest inflation figure remains consistent with the BSP’s assessment “that inflation will remain elevated in the near term but gradually revert towards the target range in end-2023.”
At its meeting on monetary policy last month, the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase facility by 25 bps to 6.25 percent.
The interest rates on the overnight deposit and lending facilities were accordingly set to 5.75 percent and 6.75 percent, respectively.
The latest baseline projections point to an elevated path over the near term. Average inflation is projected to settle above the upper end of the 2 to 4 percent target range at 6 percent in 2023, before returning to the target at 2.9 percent in 2024.
The inflation forecasts reflect the cumulative impact of the BSP’s policy rate adjustments and the slower growth outlook on both the domestic and external fronts.
Medalla said inflation expectations have increased slightly for 2023, while those for 2024 and 2025 remain near the upper end of the target band. Reuters
