BSP maintains ‘restrictive’ policy

By means of Luisa Maria Jacinta C. Jocson, News reporter

The Bangko Sentral ng Pilipinas (BSP) will keep monetary policy settings ‘restrictive’ as upside risks to the economyFto stay.

“Given the upside risks, the BSP has decided to suffWe must maintain a restrictive policy stance to ensure that we anchor inflation expectations so that this will not result in further second-round effects,” BSP Senior Assistant Governor Iluminada T. Sicat said at the Philippine Economic Briefing on Monday.

The central bank anticipates more quicklyFfrom May to July, but expects growth to remain within the 2-4% target thereafter.

“At the end of the year the average is inFinterest rate, based on our risk-adjusted outlook [will be] within target, but at the upper end of the target range,” Ms Sicat said.

The BSP’s basic forecast for inFThis year the interest rate is 3.5%, while the risk-adjusted forecast is 3.8%.

“That is precisely why the BSP needs to be very careful not to cut rates too early, otherwise we may not be able to address some of the upside risks we see going forward,” she added to.

The Monetary Board held its fifth consecutive meeting in May and kept interest rates at a 17-year high of 6.5%.

BSP Governor Eli M. Remolona Jr. previously said the central bank could start policy easing as early as August.

Ragnar Gudmundsson, International Monetary Fund (IMF) representative for the Philippines, said the BSP should maintain a “sufficiently restrictive” monetary policy untilFlation establishes Fneatly within the target.

He also said domestic data should be the main consideration when it comes to monetary policy.

“The suggestion not to monitor the Fed too closely should be understood in the context of efforts to tame domestic inflationary pressures,” he said. “If we look at the path of monitoring policy and policy interest rate decisions… the BSP’s decisions in this case should be too Fare primarily data dependent and driven by domestic price considerations.”

However, he noted that the actions of the US Federal Reserve should also be taken into consideration also influence capital outflows.

150 BPS IN RATE REDUCTIONS
Meanwhile, Treasury Secretary Ralph G. Recto said the Monetary Board could cut the policy rate by as much as 150 basis points (bps) over the next two years.

“You may get a rate cut this year and possibly more rate cuts next year,” he said at the Philippine Economic Briefing. “I certainly do not expect interest rates to rise any further. If not, they will start to decline, given time, perhaps by 150 basis points over the next two years.”

Mr Recto, a member of the Monetary Council, said the BSP has room to cut rates by the third quarter.

“That is very possible. It all depends on the inFprospects, and I guess what the Fed is doing. Those spreads should not be too wideFbetween the US and the Philippines, otherwise you may have to flee to safety. But yeah, it seems like itFThe bar is lowering,” he said.

The finance chief also expects MayFto stay within the target. May inFThe data will be released on June 5.

Head inFInflation rose from 3.7% in March to 3.8% in April, the third consecutive month of acceleration. However, it was the Fwhen the following month arrivesFThe situation has remained within the target bandwidth of 2-4%.

Mr Recto said it would be easier to reduce rates if he couldFrelationship can be settled Fclearly within the target.

“But we take into account not only domestic data, but also what the Fed will do,” he said. “It all depends on what we’re inFfacts [are]. So that’s the FThe first thing we look at… Then you look at what the Fed is going to do.”

PESO WEAKNESS
Meanwhile, BSP’s Ms. Sicat noted that while the central bank is monitoring the peso’s recent weakness, it prefers to let markets determine the exchange rate.

“I would like to reiterate the BSP’s FX policy. We do not aim for a specific exchange rate level. We just let the market determine the exchange rate level,” she said.

The peso closed at P58.11 per dollar on Monday, up eight centavos from Friday’s P58.19. Last week, the peso closed at the level of P58 per dollar for the first time in more than 18 months.

“We look at whether there is market stress. Because if we were to leave market stress unattended, it would aFfect inflation expectations. And that is something we avoid,” Ms Sicat said.

“Given that we are all affected by the current position of the Federal Reserve, I believe this is only temporary. And ultimately, once things become clearer, it will be the fundamental factors that will determine the level of the exchange rate.”

National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan said inflation expectations will not be affected as long as the peso does not remain weak for an extended period.

“It depends on whether it stays at that level for a long time, but if it is only temporary I don’t think it will have much effect on the overall future, but if it stays there for longer it will of course affect expectations . and then prices, production and so on,” he said.

Meanwhile, Mr Gudmundsson said that as long as there is no “sharp or prolonged” depreciation, its impact on inflation remains manageable.

“When you talk about the current account theFIn any case, we should also consider the fact that some depreciation could also support the Philippines’ exports, which in turn will have a positive impact on the current account deficit,” he added.

Exchange rate flexibility is also a country’s “first line of defense against external shocks,” Mr Gudmundsson said.