By Katherine K. Chan, A reporter
BANGKO SENTRAL ng Pilipinas (BSP) sees only “slight opportunity” to tighten aggressive monetary policy this year, despite renewed volatility and expectations.economy of the second half recovery.
BSP Governor Eli M. Remolona, Jr. on Tuesday said they may be more aggressive in raising their key policy rate, possibly by as much as 50 basis points (bp), amid new and emerging threats of inflation.
“May opportunity naman pero baka maliit na chance (There is a chance, but it could be a small chance),” Mr. Remolona told reporters on the sidelines of the BSP event.
In June, the Monetary Board raised its lending rate by 25 bps for the second consecutive meeting, bringing it to a nearly one-year high of 4.75%.
The BSP said this has come as they continue to see strong inflationary pressures, as oil shocks from the ongoing Gulf war continue to weigh on domestic commodity prices such as food and fuel.
The central bank plans to break the 4% rate limit over the next two years to 6.4% this year and 4.5% in 2027, before making it just above the 3% target of 3.1% in 2028.
Mr. Remolona noted that the new tax reduction measures implemented by President Ferdinand R. Marcos, Jr. when he delivered the National Address on Monday they may have an impact on the country's inflation.
“We are still balancing,” he said in Filipino. “But there is (an impact). The biggest impact will be in 2027, the smallest in 2028.”
Mr. Marcos asked Congress to pass several tax measures, including increasing the income tax exemption limit for low and low income earners and tax breaks for small, medium and small businesses.
Also, Mr. Remolona said they are still estimating the inflationary impact of the recent minimum wage increase in the National Capital Region.
The first phase of the record P85 minimum wage increase in the National Capital Region went into effect on July 25, raising the minimum wage in the region by P60 to P755 for non-agricultural workers and P718 for agricultural workers and workers in shops, services, and small manufacturing establishments.
The second phase of the wage increase or P25 will take effect on Jan. 20 next year.
A BSP official earlier said the wage hike, which was higher than expected, would put more pressure on prices but was unlikely to warrant a policy rate hike.
THE PESO SLIDE
Meanwhile, Mr. Remolona noted that the recent depreciation of the peso to a new record may cause inflation as it raises the cost of imports.
Rising oil prices amid renewed tensions in the Middle East dragged the peso to a new low of P61.847 against the greenback on July 24, down 9.7 centavos to break its previous record low of P61.75 on Thursday.
However, Mr. Remolona said the recent record low for the peso-dollar exchange rate was a “misleading number” as other currencies also suffered from the greenback's strength last week.
“But that's a misleading number because the exchange rates were moving, right? You're only looking at the peso-dollar, right?” he said. “But the rest of the world was like this, their currency was weak against the US dollar.”
However, Mr. Remolona noted that the BSP intervened very little in the foreign exchange market.
“If it's a strong dollar, we limit intervention to keep the markets in order. 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. Ubusin lang natin 'yung dollars natin. (We give them dollars. So, we cannot compete with that. We will just use our dollars),” he added.
The market is seeing the local unit test new lows this week as oil rises calls for fuel inflation concerns.
Mr. Remolona said the BSP is still adjusting its models to gauge inflation amid uncertainty over the combined impact of rising conflicts in the Middle East, Metro Manila's earnings. increase and proposed tax reduction measures.
“We're still refining because the models don't take into account the uncertainty, so we're still measuring that,” he said. “But generally, you know, the price of rice goes up or the price of oil goes up, those things themselves, you can just stick them in the models. But the associated uncertainty, the effect related to confidence, we still need to work that out.”
Despite fresh threats of inflation, the BSP official again agreedfhe emphasized his view that the economy will recover in the last half of the year.
Meanwhile, Bank of America (BofA) Global Research said the Philippines' continued vulnerability to inflation risks may keep the BSP on a tightening path as its negative output gap may continue into next year.
In a report published on Tuesday, BofA economists and analysts said the country is the most exposed to inflation risks in Southeast Asia, and inflation is likely to remain above the central bank's ceiling of 4% this year until 2027.
“Currently, as inflation is expected to remain outside the target range of 2-4% until 2027E (e) in the Philippines, we see the BSP rising again,” BofA said.
According to the bank, it expects inflation in the Philippines to accelerate to 6.7% this year, faster than its estimate of 5% during the height of the five-month war. If it does, inflation will hit the fastest pace in three years, or from 7.2% in 2023.
BofA also noted that Southeast Asian economies, with the exception of the Philippines, were able to contain lower price pressures.
“Although (in) the Philippines, the negative output gap is expected to continue until 2027,” he said. “According to the BSP, the output gap is expected to narrow gradually by the end of 2027, supported by the stabilization of investments. Rising real wages are also expected to support consumption, while stronger exports may provide additional impetus to demand.”
The Monetary Board will hold its next rate-setting meeting on Aug. 27, followed by two general reviews of the policy on Oct. 22 and Dec. 17.
