BSP chief sees 'small chance' of aggressive tightening amid renewed volatility

The Bangko Sentral ng Pilipinas (BSP) sees only a “small chance” of more aggressive monetary policy tightening this year, despite renewed volatility and expectations of a second-half economic recovery.

BSP Governor Eli M. Remolona, Jr. on Tuesday said they could be more aggressive in raising their key policy rate, potentially with a larger 50-basis-point (bp) move, amid fresh and emerging threats to inflation.

“May chance naman pero baka maliit na chance (There’s a chance, but it could be a small chance),” Mr. Remolona told reporters on the sidelines of a BSP event.

In June, the Monetary Board hiked its benchmark borrowing rate by 25 bps for a second straight meeting, bringing it to a nearly one-year high of 4.75%.

The BSP said this move came as they continue to see strong inflationary pressures, with oil shocks from the ongoing Gulf war still feeding into the costs of local commodities such as food and fuel.

The central bank projects the headline print to breach its 4% ceiling over the next two years at 6.4% this year and 4.5% in 2027, before settling slightly above the 3% target at 3.1% in 2028.

Mr. Remolona noted that the new tax relief measures pushed by President Ferdinand R. Marcos, Jr. during his State of the Nation Address on Monday may have an impact on the country’s inflation.

“We’re still estimating it,” he said in Filipino. “But there is (an impact). The major impact will be in 2027, with a smaller one in 2028.”

Mr. Marcos called on the Congress to pass several tax measures, including raising the threshold for income tax exemptions for low- and middle-income earners and tax breaks for micro, small, and medium enterprises.

Also, Mr. Remolona said they are still estimating the inflationary impact of the recent minimum wage hike in the National Capital Region.

The first tranche of the record PHP 85 minimum wage hike in the National Capital Region took effect on July 25, bringing the minimum wage in the region up by PHP 60 to PHP 755 for nonagricultural workers and to PHP 718 for agricultural workers and employees of retail, service, and small manufacturing establishments.

The second tranche of the wage hike or PHP 25 will take effect on Jan. 20 next year.

The BSP chief earlier said that the wage hike, which came higher than they anticipated, will pose significant price pressures but is unlikely to warrant an outsized policy rate hike.

Peso slide

Meanwhile, Mr. Remolona noted that the peso’s recent slump to a new record low could stoke inflation as it pushes import costs higher.

Soaring oil prices amid renewed conflict in the Middle East dragged the peso to a fresh low of PHP 61.847 against the greenback on July 24, down 9.7 centavos to break its previous record low of PHP 61.75 on Thursday.

However, Mr. Remolona said the latest record low peso-dollar exchange rate is a “misleading number” as other currencies have also suffered from the greenback’s strength last week. 

“But that’s a misleading number because exchange rates were moving, right? You’re looking only at peso-dollar, right?” he said. “But the rest of the world has been, their currencies have been weakening against the US dollar.”

Still, Mr. Remolona noted that the BSP intervened very minimally in the foreign exchange market.

“When it’s a strong dollar, we limit intervention to just maintain orderly markets. Because if we intervene against a strong dollar, we’re just helping the rest of the world get their dollars,” he said.

“Binibigyan natin sila ng dollars. So, wala tayong laban sa gano’n. Uubusin lang natin ’yung dollars natin. (We give them dollars. So, we can’t compete with that. We will just use up our dollars),” he added.

The market sees the local unit testing new lows this week as rising oil costs fuel inflation concerns. 

Mr. Remolona said the BSP is still refining its models to assess the inflation outlook amid uncertainty over the combined impact of escalating tensions in the Middle East, the Metro Manila wage hike and proposed tax relief measures.

“We’re still refining because the models don’t necessarily take account of the uncertainty, so we’re still calibrating that,” he said. “But the usual, you know, the price of rice goes up or the price of oil goes up, those things in themselves, you can just stick them into the models. But the associated uncertainty, the associated effect on confidence, we still need to fix that.”

Despite fresh inflationary threats, the BSP chief also reaffirmed his outlook that the economy would rebound by the latter half of the year.

Meanwhile, Bank of America (BofA) Global Research said the Philippines’ continued vulnerability to inflationary risks may keep the BSP on a tightening path even as its negative output gap could persist until next year.

In a report published on Tuesday, BofA economists and analysts said the country is the most exposed to inflation risks among Southeast Asian countries, with its inflation likely to stay above the central bank’s 4% ceiling this year until 2027.

“Meanwhile, as inflation is expected to stay outside the 2-4% target range through 2027E in (the) Philippines, we see BSP hiking once more,” BofA said.

According to the bank, it expects Philippine inflation to accelerate to 6.7% this year, faster than its 5% estimate during the height of the five-month long war.  If realized, inflation will hit its fastest pace in three years, or since 7.2% in 2023.

BofA also noted that Southeast Asian economies, except the Philippines, have been able to contain underlying price pressures.

“Whereas in (the) Philippines, the negative output gap is expected to persist through 2027,” it said. “According to BSP, the output gap is expected to gradually narrow by the end of 2027, supported by a recovery in investment. Rising real wages are also expected to support consumption, while stronger exports could also provide additional impetus to demand.”

The Monetary Board will have its next rate-setting meeting on Aug. 27, followed by two more regular policy reviews on Oct. 22 and Dec. 17. — Katherine K. Chan, Reporter