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Friday, March 29, 2024

BSP remains hawkish, weighs new rate hike

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Bangko Sentral ng Pilipinas Governor Felipe Medalla said monetary authorities remain hawkish and are ready to act accordingly if inflation in February does not decelerate from a 14-year high of 8.7 percent in January.

Medalla said in an interview at the sidelines of the 2023 annual reception for the banking community Friday night monetary authorities would have no reason to raise the policy rate if inflation would show a slowdown in February, but would act if it would continue to rise.

“If we saw that prices are lower in February than in January, why should we? We are still hawkish… If the February inflation is bad, we will act. But we are hawkish for a reason…It is the data,” Medalla said, referring to economic data such as the consumer price index and the gross domestic product growth.

“The most likely scenario is maybe one more [hike]… But if I see a negative month-on-month [inflation], I may change my mind… We are hoping that non-monetary measures will reduce inflation,” he said.

Medalla did not say whether inflation peaked in January. He said if non-monetary measures started working, then the January figure would be the highest.

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“We are looking now at month-on-month… The main scenario is that February inflation will be lower than January,” Medalla said.

Finance Secretary Benjamin Diokno, a member of the Monetary Board, echoed Medalla’s observation. “Definitely, February inflation will be lower than in January… That is my guess. [The] price of oil has stabilized. The peso has also stabilized. What remains is food. Sugar imports have arrived, and it is just a matter of distribution,” he said.

Diokno said importation was not the only answer to cool down inflation. He said goods should reach the markets and should be strictly monitored.

“That is the role of LGUs [local government units] because if there are people [monitoring] the markets, it affects the behavior [of traders]… So we are doing everything. Even rice has no significant impact on inflation,” Diokno said.

Medalla said a 75-basis-point rate hike was quite unlikely “because the main impetus behind inflation is not demand…What is happening is what we call second-order effects…Prices are rising because previous increases influence future increases,” he said.

“I’m not ruling out anything but if you look at 0, 25, 50 and 75 [bps], the extremes are less likely,” Medalla said.

Medalla said the data was fluid, making it hard to forecast the next action of monetary authorities. “What we are seeing is unusual because historically, in the past, 15 straight months of headline [inflation] above 4 [percent] is the longest already… Now, the way it looks, it could be as long as 18 to 19 straight months,” he said.

The BSP raised on Feb. 16 the benchmark interest rate by 50 basis points to 6 percent to rein in inflation that blew past the target range last year and accelerated to 8.7 percent in January 2023. The interest rates on the overnight deposit and lending facilities were also raised to 5.5 percent and 6.5 percent, respectively.

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