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BSP warns of supply shocks, interest hike

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Large supply shocks will compel the Bangko Sentral ng Pilipinas to again raise the benchmark interest rate which is now at 6.25 percent, Governor Eli Remolona said Friday.

Remolona said in an interview with Nomura research analyst Euben Paracuelles the country was not yet “out of the woods,” meaning risks remained that could impact the economy and the trajectory of inflation.

“If we have new supply shocks on inflation, which are unusually large, and if El Nino turns out to be very severe and combined with a confluence of other factors, we would have to tighten again,” Remolona said.

He said inflation settled at 4.7 percent in July, and the BSP wanted it to fall within the target range of 2 percent to 4 percent.

“But we also want to be comfortable that inflation is staying within that range and inflation expectations remain anchored. As you know, if we don’t tighten when those shocks materialize, then expectations could get out of hand, inflation will feed on itself and it gets much harder for us,” he said.

Remolona said the recent pauses by the Monetary Board in the past two meetings meant the signals from the data were still mixed and not consistent. He said some indicators showed the economy was holding up, while others showed it was weakening.

“If this continues, then it’s likely prudent for us to still pause,” Remolona said. The policy-setting Monetary Board will hold its next meeting on Aug. 17, 2023.

Remolona said local inflation would have more weight in the BSP’s next policy moves, although it was closely watching the actions of the US Federal Reseve.

BSP Deputy Governor Francisco Dakila Jr. said inflation might return to the target range before the fourth quarter of 2023.

Dakila said in a panel discussion during the Post-SONA Philippine Economic Briefing in Cebu the latest trajectory of inflation in the past six months was very encouraging. He said inflation was forecasted to average 5.4 percent this year, still above the target range.

“Barring any unforeseen supply shocks… inflation should be below 4 percent by the fourth quarter this year,” Dakila said. “There is a chance we may go back to the target [range] even before the fourth quarter.”

Inflation eased for the sixth straight month in July, pulled down by slower year-on-year increases in the prices of food and non-alcoholic beverages, housing, water, electricity, gas and other fuels. From a peak of 8.7 percent in January 2023, inflation eased to 8.6 percent in February, 7.6 percent in March, 6.6 percent in April, 6.1 percent in May and 5.4 percent in June.

The BSP raised the overnight borrowing rate by a total of 425 basis points to 6.25 percent from May 2022 until March 2023, before taking a prudent pause in the last two Monetary Board meetings amid the sustained easing of inflation.


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