BSP signals reversal in tightening cycle ‘unlikely in next few months’

Metro Manila (CNN Philippines, December 20) — Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona has signaled that a reversal in the monetary tightening cycle is unlikely anytime soon, in the wake of authorities recalibrating their forecasts for a “strong episode” of El Nino extending into the second quarter of 2024.

“Yes, we are unlikely to cut rates in the next few months,” Remolona said on Wednesday. “We’re in a higher-for-longer when I say hawkish, that means high for a while.”

El Niño could stoke inflation by as much as 0.02 percentage points, with spikes likely to be felt through food and power costs, BSP officials said.

Inflation has cooled to 4.1% in November, but the 11-month tally of 6.2% remains outside the central bank’s 2%-4% target band.

At last week’s rate-setting meeting, the policymaking Monetary Board kept its key policy rate unchanged at 6.5%, marking the second successive review where it did not touch borrowing costs. Before that pause, the central bank’s tightening cycle saw rates rising by a total 450 basis points from a record-low of 2% early last year.

Remolona said inflation could fall “below 3% in Q1” but “go above 3% in April, June, July,” so the conditions for a reversal from the tightening cycle are not yet on the horizon.

The central bank wants to put a lid on inflation within the 2% to 4% range in 2024. Next year’s inflation will likely be “closer to the ceiling than to the middle, or closer to 4% than to 3% for the year as a whole,” Remolona said.

“If most of the numbers point in the right direction, including expectations, they really settle into this comfortable range around 3% for inflation, then we will consider cutting rates,” he added.

Supply shocks—mostly from the external front like fuel, rice and other food imports— more than demand were to blame for inflation peaking beyond 8% this year. The El Niño episode is adding to this that would put pressure on prices.

“We’re still not out of the woods when it comes to inflation,” Remolona said. “And if there are further supply shocks, then it makes it all harder.”

Monetary authorities also are on the lookout for a possible contagion arising from an environment of high interest rates.

“There’s always the issue of financial crisis, especially when you are in an environment of higher-for-longer, in the past higher-for-longer has led to bank failures,” Remolona said, referring to the fallout from the failure of Silicon Valley Bank and Credit Suisse.

“These are kind of warnings and thankfully these incidents didn’t lead to global crisis… This does not mean that there may be other banks that are in trouble. These two incidents in May did not lead to a contagion that reached our shores. But the next one might have a contagion. We don’t know. We are just trying to make sure that our banks are resilient… We are trying to be ready for the worst,” he added.