Manila, Philippines – Before any action by the US Federal Reserve, discussing the potential reduction of interest rates appears premature. The central bank is currently observing the impact of its year-long policy tightening on the economy.
In an interview with Bloomberg, Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona conveyed that a rate cut seems distant due to persistent inflation risks, despite the headline rate showing a downward trend.
Governor Remolona emphasized that it is too early to contemplate a rate cut, considering the economy’s robustness and inflation exceeding the target range.
The BSP evaluates whether to proceed with a hike or maintain the current rates rather than considering a rate cut.
As an inflation-targeting central bank, the BSP adopts a hawkish stance to achieve the target range of two to four percent.
In June, inflation eased for the fifth consecutive month and settled at 5.4 percent. However, the first semester’s headline rate was 7.2 percent, exceeding the economic team’s assumption for 2023.
The Governor expressed concerns regarding upside risks like El Niño and potential wage increases. He emphasized the importance of closely monitoring second-round effects.
The central bank raised key policy rates by 425 basis points to address the ongoing inflation issue.
Following a pause in May, the BSP has since halted its tightening cycle at 6.25 percent, allowing time to assess the impact of the yearlong tightening measures on the economy.
Remolona mentioned that their models were not prepared for the observed supply shocks, necessitating a thorough examination of the economic situation before making further decisions.
According to the BSP forecast, inflation is projected to return to the target range by the fourth quarter and drop below two percent by the first quarter of 2024.
Furthermore, a rate cut may arise if there is a risk of a global recession due to the US Federal Reserve being in a hiking mode, leading to tightened global financial conditions.
The US Fed is scheduled to convene next week, indicating an upcoming rate increase after the previous pause.
The BSP, however, has another policy meeting scheduled in August.
Governor Remolona underscored the significance of the three-week gap between the meetings, as an excessively wide difference between the policy rates of the two central banks might unsettle some market participants and result in a peso retreat.
While minor fluctuations in the peso are acceptable, sharp movements can impact expectations and raise concerns for the central bank.
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