Rate cut not yet in the picture — Diokno

An interest rate cut by the Philippine central bank “is not yet in the picture,” according to Finance Secretary Benjamin E. Diokno.

Mr. Diokno, a member of the Monetary Board, said the Bangko Sentral ng Pilipinas (BSP) “may maintain the current (policy) rate” at a near 16-year high of 6.25% even if inflation is on a downtrend.

“I think the newly appointed central bank governor said that we want to make sure that we are really on track with our inflation target before we even talk about a rate cut. We may maintain the current rate, but a rate cut is not yet in the picture,” he told ABS-CBN News Channel on Monday.

Inflation eased for a fifth straight month in June to 5.4%. However, this marked the 15^th straight month that inflation exceeded the central bank’s 2-4% target.

For the first six months of the year, inflation averaged 7.2%.

At its June meeting, the Monetary Board kept its benchmark interest rate unchanged for the  second time at 6.25%. The Monetary Board raised borrowing costs by 425 basis points (bps) from May 2022 to March 2023.

BSP Governor Eli M. Remolona earlier said it is premature to talk about rate cuts because risks to inflation and uncertainty over the policy moves of the US Federal Reserve might affect monetary policy.

The BSP’s next policy-setting meeting is on August 17.

Citigroup, Inc. Chief Executive Officer for the Philippines Paul A. Favila said that the central bank might remain cautious in its monetary policy stance.

“I don’t think that (the BSP) will need to tighten any further, barring any unexpected developments. If things go well, then I think inflation will continue to remain under control,” he told reporters.

Mr. Favila said the BSP might not keep interest rates elevated for an extended period of time beyond what is needed.

“The sooner that conditions allow the central bank to lower interest rates; I think that’s exactly what we will try to do. But I don’t expect that to happen anytime soon. Probably early next year,” he said.

Mr. Favila said he is not worried about the US Federal Reserve anymore, even if it continues to tighten policy.

“Things have already settled and we’re already starting to see the situation in the United States really taper off. (US) inflation has gone below 5% already. They’re putting those final hikes (for good measure) and that will not be a concern for the rest of the world,” he said.

The Fed’s next policy meeting is on July 25-26.

Inflation
Meanwhile, Mr. Diokno expressed confidence inflation would continue to slow in the coming months.

“We expect to overshoot the inflation target to below 2% by the first quarter of 2024. But for the whole 2024, we expect inflation to be right smack in the middle, which is around 3%,” he added.

The BSP sees inflation averaging 5.4% this year and 2.9% in 2024.

A recent P40 minimum wage hike in the National Capital Region would unlikely result in higher inflation, Mr. Diokno added.

“If I remember right, the BSP assumes a 4% increase in minimum wage, as long as it doesn’t breach that, we are on track with the inflation target,” the Finance secretary said.

However, Mr. Favila said the El Niño weather pattern and its impact on agriculture, as well as the proposed P150 legislated wage hike could add to inflationary pressures.

Targets
Meanwhile, Mr. Diokno reiterated that the government is on track to achieving its targets under the medium-term fiscal framework (MTFF).

“I can say we are on track, in fact, we are better than on track. Our debt-to-gross domestic product (GDP) ratio is much lower than anticipated. Our deficit-to-GDP is lower than anticipated, and we collect the right revenues, so we are on track with our MTFF (targets),” he said.

The National Government’s (NG) outstanding debt as a share of GDP stood at 61% as of end-March, slightly higher than 60.9% at the end of December. It is still above the 60% threshold considered manageable by multilateral lenders for developing economies.

Under the MTFF, the government aims to cut the debt-to-GDP ratio to less than 60% by 2025, and further to 51.5% by 2028.

The NG’s deficit-to-GDP ratio stood at 4.84% at end-March, lower than 6.41% in the first quarter in 2022.

Under the MTFF, the government is aiming to bring the deficit-to-GDP ratio to 3% by 2028.

Mr. Diokno said the Finance department’s proposed tax measures could bring in almost P1 trillion in additional revenues if approved by Congress.

“If we get all those taxes, including the mining tax, over the next five years, we will be able to collect close to PHP 1 trillion,” he added.

The proposed measures include a new mining fiscal regime, a value-added tax on digital transactions, “junk food” tax, higher excise taxes on sweetened beverages, motor vehicle road user’s tax reform, and the Passive Income and Financial Intermediary Taxation Act.

Growth
Citigroup’s Mr. Favilla said he expects Philippine growth to remain “very much intact.”

“Anything above 5% (GDP growth) is great,” he said.

The government is targeting 6-7% growth this year.

In the first quarter, the economy expanded by 6.4%, its slowest expansion in two years. To achieve the lower end of the target, the economy would need to grow by an average of 5.9% in the next three quarters, according to the National Economic and Development Authority.

Mr. Favilla said there are also no “significant threats” to growth this year.

“We continue to stimulate the consumption story that normally underpins Philippine economic growth. We should be able to maintain that kind of momentum,” he said, adding that high interest rates do not appear to have dampened growth so far. — Luisa Maria Jacinta C. Jocson and Keisha B. Ta-asan