NextGen Day

Felipe Medalla, the governor of the Bangko Sentral ng Pilipinas (BSP), stated on Tuesday that rises in the key policy rates of the central bank are still conceivable given that inflation is still high but he discounted significant increases, noting falling oil prices and a weaker US dollar.

When asked if a 25-basis point hike was feasible at the next two Monetary Board (MB) sessions, which set policy for the central bank, Medalla responded in the affirmative.

He told reporters, “I will rule out really severe forecasts.

Since last May, the BSP has increased its key policy rates by a total of 350 basis points, primarily as a result of an increase in the rate of price increases, which reached an all-time high of 8% in November last year.

The overnight reverse repurchase (RRP) rate of the central bank is currently at 5.5 percent after hitting a record low of 2 percent in 2020.

It increased by 50 basis points on December 15 of last year, a slower increase than the 75 basis points in November. This is the second increase of the same magnitude this year, also due to the necessity to maintain an adequate interest rate divergence with the US Federal Reserve.

The rebound of the peso versus the US dollar, which is currently trading at 55 after hitting its record-low 59 levels last October, is what Medalla ascribed to his rate hike expectations.

The strong dollar era appears to be ended, he said.

Medalla made it clear that he does not think the present peso-to-dollar exchange rate is at a level that is conducive to comfort.

I’m only saying that the weak peso making the inflation worse is no longer a major issue, he added.

He referred to the decline in oil prices on the world market, which is presently at USD80 per barrel after rising to above USD100 per barrel in recent months due to the conflict between Russia and Ukraine and worries about the global economy.

He claimed that these elements have a significant impact on the inflation forecast made by the central bank.

For the third quarter of the following year, “our projection for inflation is really closer to 3 (percent) than to 4 (percent), and possibly below 2 percent near the end of the following year and early in 2024,” said Medalla.

The Board kept the 2022 average inflation forecast at 5.8 percent, increased the 2023 forecast from 4.3 percent to 4.5 percent, and decreased the 2024 projection from 3.1 percent to 2.8 percent during the MB’s rate-setting meeting last December 15.

A reduction in the reserve requirement ratio (RRR) for banks, according to Medalla, is still an option, but not in the near future since “we don’t want to mislead the markets.”

Realistically, he continued, “we should be able to accomplish that because all we have to do is borrow more to mop up the liquidity cost by the RRR cut but to avoid confounding the market, it has to wait until we’re no longer in a growing mode.”

As of right now, the RRR for universal and commercial banks (U/KBs) is 12 percent, ranking among the highest in the area.

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