Metro Manila (CNN Philippines, August 2) — Barely two months since taking the helm of the Bangko Sentral ng Pilipinas (BSP), economist Felipe Medalla has been giving the market forward guidance in a clear language–a fresh deviation from the typical cryptic central bank speak.
Last week, the BSP governor hinted at a rate hike forthcoming when the policymaking Monetary Board meets to review borrowing costs this August 18th.
But on Tuesday, his speech before bankers congregating as the Financial Executives Institute of the Philippines (FINEX) was more certain and needed no decoding.
“Next meeting it’s not zero, not 75 [basis points],” Medalla told FINEX members, adding that the BSP will be hiking rates at a pace of a quarter to half-a-percentage points, at most.
That’s less hawkish than the unscheduled 75-basis-point increase that the Monetary Board delivered in mid-July–the first market-moving decision it made since Medalla took over as BSP chief.
But as oil futures point to easing global crude prices, Medalla said the BSP could control inflation back to its target by 2023, such that next year’s reading could average at “lower than 4%.”
The central bank earlier put the average inflation forecast for 2023 at 4.2%. At its June meeting, it raised the average inflation forecast for this year to 5% from 4.6% previously.
“We have now a better 50-50 chance to do lower than 4 [percent inflation]. And that is why we are doing 50 or 25 [basis points rate hike] next meeting,” a more straightforward Medalla said, adding that his BSP colleagues may disapprove of his giving exact figures.
In a market jolted by volatility for months and formerly anxious over a central bank it earlier thought to be behind the curve, clarity in central bank signals is an investor’s north star.
“The BSP decided to prepare the market first. Baby steps, 25, 25 [basis points]. When the leadership shifted to Governor Felipe, he provided forward guidance,” former BSP Deputy Governor Diwa Guinigundo said in a July 14 interview when asked about his assessment of the central bank’s pace of policy reversal.
Higher interest rates mean it will be more expensive to borrow for home and car loans as well as credit cards, therefore dampening consumption–a major economic driver. But under his watch, Medalla said controlling inflation takes precedence over stoking economic growth.
“What if I am wrong? I still will not regret it because GDP growth is not one of our three pillars,” Medalla told his FINEX audience.
“The midpoint of our forecast for next year is 4.2… so relative to our year-ahead forecast of what the inflation rate will be next year, the policy rate is still negative in real terms so we can afford to step on the brakes without killing the economy, this nascent economic growth,” he added.
