Steady focus on handling inflation, interest rates

After his predecessor led the central bank amid the elevated inflation, what could be the next expected on the inflation situation and interest rates under the new Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona?

Mr. Remolona commenced his six-year term on July 3, replacing Felipe M. Medalla, who served as the head of the BSP for a year.

The former governor steered the BSP through record-high inflation. After averaging 5.8% last year — a 14-year high and surpassing the 2-4% target range — the country’s inflation rate reached 8.7% in January this year, its highest since November 2008. To control inflation, Mr. Medalla led an aggressive monetary tightening campaign. Interest rates increased by 425 basis points from May 2022 until March 2023, with policy rate reaching nearly 16-year high at 6.25%.

Inflation began to marginally ease in February and decelerated further to 5.4% last month. But Mr. Medalla had seen inflation to be beyond the 2-4% target since April 2022 until September this year.

“Unless there are new shocks, we should see inflation below 4% before the end of this year,” Mr. Medalla was quoted as saying.

Similarly, Mr. Remolona expected the inflation rate to go back to BSP’s target range before the end of 2023.

“Inflation has finally started to come down, and if our models are right, we should be back in our target range even by the end of this year,” the new central bank governor said earlier this month, during the turnover ceremony and BSP’s 30^th anniversary.

The slowdown of inflation seen in June was better than the expectation, Mr. Remolona said in a ����ý report, hence it “somewhat” supported the keeping of rate hikes on pause.

BSP paused its aggressive monetary tightening campaign last May at 6.25% and retained it during its policy meeting last month.

The central bank might think of a rate cut if inflation goes under 4%, said Mr. Remolona. It would also take the US Federal Reserve’s policy decisions into consideration.

“We’ll do [the cut] one meeting at a time. But in doing it one meeting at a time, we’ll also look forward to what we might do down the road,” he said in a report from July 7. “We’re not looking at just one policy rate. We’re looking at a path of the policy rate.”

However, despite inflation easing for five consecutive months, Mr. Remolona still sees inflation in upside risks with the impact of El Niño and the increase of minimum wage.

“For now, we’re contemplating whether to hike or not to hike. We’re not thinking about whether to cut or not to cut,” Mr. Remolona said in a Bloomberg TV interview aired on July 17.

He added that the BSP was still “more on the tightening side.”

As the inflation rate remained to be above the 2-4% target, Mr. Remolona believed that talking about rate cuts was still “premature.”

“We want to be well into the target range first before we consider anything like a rate cut. It could depend on how weak the economy is or how strong the economy is. But we will see,” he said.

Mr. Remolona will lead his first policy meeting on Aug. 17.

Inflation was at 7.2% in the first six months of 2023, which still exceeds the 5.4% full-year projection of the BSP. The central bank then expected inflation to slow further to 2.9% in 2024.

More recently,  the BSP expressed its readiness to resume its policy tightening if necessary in light of the continuing challenge brought by inflation.

“The BSP remains watchful and remains ready to resume monetary tightening as warranted by the data on the inflation outlook and domestic demand prospects,” BSP Deputy Governor Francisco G. Dakila, Jr. said during the “Post-SONA (State of the Nation Address) Philippine Economic Briefing” last July 25.

Mr. Remolona, in the same briefing, highlighted inflation as a challenge the central bank still faces.

“Fortunately, the BSP’s inflation-targeting framework has served us well in the face of unusual supply shocks. We continue to focus on our mandate of price stability and have dedicated our resources and attention in pursuit of this goal,” he said in a recorded message.

“Our models tell us that inflation will be within the target range of 2 to 4 percent by the 4th quarter of 2023,” the governor reiterated. “This is the range that we think is ideal for an economy like the Philippines when it is growing at full capacity.”

Climate change risks

On top of managing the inflation, Mr. Remolona also said that BSP is committed to managing climate change risks.

“What we’re trying to do is work with climate scientists to develop a taxonomy of bank assets related to climate change,” Mr. Remolona said.

“We look at each kind of loan or each kind of asset and what it’s financing, and decide what it’s doing for climate change. Is it bad? Is slowing down climate change? Or is it accelerating our climate change?” he added.

The BSP, he continued, will give banks an overall of rating of their role in climate change based on how each type of assets in the books of the banks weigh. Upon disclosure of the ratings, the banks will be asked to disclose the assets.

“We hope the disclosure alone would do the trick,” he said, adding that the BSP also has additional tools to encourage banks to mitigate climate change.

Moreover, according to the BSP’s first sustainability report, released earlier in July, the BSP “has taken definite actions in promoting the sustainability agenda in the financial industry,” beginning with the adoption of the Sustainable Central Banking (SCB) Program, which highlights BSP’s roles as enabler, mobilizer, and doer of sustainable policies and work practices; and, later on, the 11-Point SCB Strategy, the implementation of which is intended to “mainstream green and sustainability principles and practices in its operations and across the financial system.”

The report also highlights that the central bank plans to issue detailed guidelines for banks in conducting their own climate stress testing using their own data; as well as to update sustainability reporting requirements in the financial sector. — Chelsey Keith P. Ignacio with A.P.B. Conoza