BSP signals more tightening in 2023

THE BANGKO SENTRAL ng Pilipinas (BSP) signaled further tightening in 2023, as it aims to bring inflation to near 3% by the third quarter.

“Our goal is to have inflation between 2-4%, preferably closer to 3% than to 4% by the third quarter of next year, and then the fourth quarter until 2024 will also be like that. That’s our goal,” BSP Governor Felipe M. Medalla told reporters on Tuesday.

Inflation at the national level accelerated to a 14-year high of 8% in November, bringing the full-year average to 5.6%. This is lower than the BSP’s 5.8% full-year forecast but well above its 2-4% target.

Mr. Medalla earlier said there may be rate hikes in the Monetary Board’s (MB) first two meetings in 2023. The schedule of the MB meetings for 2023 have yet to be released.

Asked if the MB will continue to raise interest rates next year, Mr. Medalla said a pause in the tightening cycle is unlikely after its first two meetings next year.

“I would say we’re data dependent, but clearly…one cannot rule out that after two meetings next year, there’d be no more rate hikes. But given the nature of surprises, one can never say never,” he said in a mix of Tagalog and English.

“So, I think it’s safe to say that the terminal policy rate is higher than what we have now. How much higher is what we don’t know,” he said, adding that the terminal policy rate could be at 6% by end-2023.

The BSP raised borrowing costs by 50 basis points (bps) to 5.5% last week, bringing the policy rate to the highest since November 2008 when it was at 6%.

Since May, the Monetary Board has hiked rates by a total of 350 bps.

According to Mr. Medalla, the current policy rate of the BSP is “quite high” already.

He also said the BSP may consider smaller rate hikes next year, noting there is a higher chance of 25-bp or 50-bp rate increases at its next two policy meetings.

However, there are a lot of uncertainties, Mr. Medalla said, and these would affect the BSP’s policy decisions moving forward.

“Who could’ve forecasted that three months before it happened, the Fed will have four 75 (bps)? In forecasting, you have to always be prepared for anything. That’s why we always say we’re very data dependent,” he added.

The US Federal Reserve has increased its benchmark policy rates by 425 bps, which brought the policy rate to 4.25-4.5%.

Asked if the dollar is starting to weaken against the peso, Mr. Medalla said it is not surprising given that the pace of rate hikes by the US central bank is beginning to slow.

This as the Philippine peso on Tuesday closed at P55.24 against the US dollar, up by 17 centavos from its P55.41 finish on Monday.

Year to date, the peso has weakened by 8.3% or P4.24 from its P51-a-dollar close on Dec. 31, 2021.

RRR CUT NEXT YEAR POSSIBLE
Meanwhile, the BSP may consider cutting banks’ reserve requirement ratio (RRR) by June next year, if inflation slows down as projected.

“We don’t want to confuse the markets. We don’t want to be raising rates and cutting RRR,” Mr. Medalla said.

“In reality, we should be able to do that because all we have to do is borrow more to mop up the liquidity cost by the RR cut. But to avoid confusing the market, it has to wait when we’re no longer in an increasing mode,” he said.

If there are indications that inflation will fall below 4%, Mr. Medalla said there may be an RRR cut before end-June.

The BSP earlier committed to bringing down the RRR of big banks to single digits by 2023.

The RRR for big banks is currently at 12%, one of the highest in the region. Reserve requirements for thrift and rural lenders are at 3% and 2%, respectively. – Keisha B. Ta-asan