BSP eyes point target for inflation

The Bangko Sentral ng Pililipinas (BSP) said it is looking at shifting to a point target for inflation, from the current 2-4% target band, its top official said.

“We’re seriously thinking of just having a point, a target level,” BSP Governor Eli M. Remolona, Jr. told reporters in a press chat on Friday.

“A single number, yes. In the US, it’s just 2%. In many other central banks, it’s just one number,” he added.

In December, the Development Budget Coordination Committee, in consultation with the BSP, set the inflation target at 2-4% from this year until 2028.

A medium-term inflation target helps “strengthen the forward-looking approach to monetary policy formulation with the view of helping anchor inflation expectations to the target,” the central bank earlier said.

Mr. Remolona said the inflation target they are eyeing may be a bit lower than the 3% midpoint of its current target band.

“Maybe 2% is good enough. We don’t know yet. We’re crunching the numbers,” he added.

The target also cannot be too low, Mr. Remolona said, as this has implications on economic output.

“The reason it’s not zero is because in a growing economy, you have to allow relative prices to change. And when you allow relative prices to change, they tend to be sticky downwards.”

“Allowing them to change means some inflation. It constrains the economy if you have too low a target,” he added.

In the past, the central bank had relied on operating targets under a framework for monetary aggregates in its policy decisions, according to a study by the International Monetary Fund (IMF).

The BSP adopted a modified targeting approach in 1995 after inflation spiked to double-digit levels amid a rice supply shortage. This approach focused more on price stability rather than monetary aggregate ceilings.

In 2002, the central bank formally shifted to inflation targeting.

From 2012 to 2014, the target range for inflation was 4% ± 1.0 percentage point. In 2015, the BSP’s inflation target was set at 3% ± 1.0 percentage point and this was applied up until 2022, though the central began using the alternative 2-4% band around this time.

The BSP is currently working with the IMF on studying the shift to a point target for inflation.

“There won’t be an update soon. It was something we asked the IMF to look at. They won’t be able to give us something very soon, they take their time. But I’m comfortable with our band between 2% and 4%.”

The central bank could transition to the point target a year from now at the latest, he added.

RRR cuts

Meanwhile, the BSP chief said reserve requirement ratio (RRR) cuts are unlikely for the rest of the year.

“Maybe (RRR cuts) for next year. Because we’re trying to make the yield curve more reliable, which means managing liquidity in the system better than we have and that the reserve requirement is a factor in that,” Mr. Remolona said.

“So far, we’ve been trying to manage liquidity by issuing our own BSP bills. We’ve been issuing large amounts of BSP bills in an effort to absorb the liquidity in the system.”

As of March, the RRR of universal and commercial banks and nonbank financial institutions with quasi-banking functions was reduced by 200 basis points (bps) to 5% from the current 7%.

The RRR for digital banks was also lowered by 150 bps to 2.5%, while the ratio for thrift lenders was cut by 100 bps to 0%.

Rural and cooperative banks’ RRR has been at zero since October, the last time the BSP cut reserve requirements.

“Reserve requirement (cuts) expand liquidity that’s in the system. So, we’re trying to manage that,” Mr. Remolona said.

“We might start issuing BSP bills. An alternative to that is selling the Treasury securities that we hold. That has the same effect on liquidity.”

Earlier data from the central bank showed that around 50% of its market operations are done through the BSP bills.

‘De-dollarization’

Meanwhile, Mr. Remolona said that veering away from the dollar as the world’s reserve currency would be a long and slow process.

This amid talks of “de-dollarization” or the shift away from the US dollar amid policy uncertainty from President Donald J. Trump’s administration.

“As you know, it’s been a safe-haven currency for a long time. Every time there’s some tension somewhere in the world, the dollar strengthens. Money moves into the dollar.”

“In theory, the safe-haven advantage of the dollar may be reduced over time. But it’s a slow process. It doesn’t happen right away,” he added.

The dollar index, which measures the greenback against a basket of currencies, hit a three-week trough, Reuters reported.

For the week, the dollar was down 1.9%, on track for its biggest weekly percentage decline since early April.

This after Mr. Trump unleashed his latest trade threats, recommending 50% tariffs on European Union imports from June 1 and considering a 25% tariff on any Apple iPhones made outside the US.

Mr. Remolona noted that the United Kingdom’s top invoicing currency used to be the US dollar and their trade was done through dollars as well.

“Then they had Brexit and their invoicing currency moved to the euro. So, this dominance of the dollar is not permanent. It can be eroded,” he said.

Mr. Remolona also noted the failure to produce an “international currency.”

“There was an effort to make international currency. That hasn’t worked out. So, it’s still not very liquid. Those talks come and go,” he said.

“Before the renminbi, it was the Japanese yen. Didn’t work out. I’m not sure there’s a different strategy. It’s still talk. It might be a long while.” – Luisa Maria Jacinta C. Jocson, Senior Reporter