Rate cut possible this year – Remolona

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. is not ruling out a policy rate cut within the year, given the moderating inflation outlook due to base effects.

He also said that if the 2023 economic growth exceeds expectations, the hawkish Monetary Board, BSP’s policy-making arm, may go the other way and raise the current 6.5 percent benchmark rate some more after a cumulative 450 basis points (bps) adjustments since May 2022.

This pronouncement is consistent with Remolona’s unrelenting signal to the market that BSP’s monetary policy stance will remain tight for longer, for as long as inflation is not firmly within the target range of two percent to four percent.

“A rate cut is possible within the year, but maybe first semester is too soon. We’ll see,” he said in a mixture of English and Filipino at the sidelines of the BSP’s 2024 Annual Reception for the Banking Community, also known as Bankers’ Night, on Jan. 26 at Fort Abad, BSP Manila.

Remolona said the January inflation number is expected to be less than December’s 3.9 percent, and definitely lower than January 2023’s peak of 8.7 percent.

He reiterated what he said last week that the first quarter inflation numbers will be lower due to base effects, but the second quarter consumer price index (CPI) will be “a bit high so we have to adjust for that.” But, he clarified, “it’s high because of base effects, it’s not because inflation is really high.”

Previously, Remolona already said that he estimates a stronger fourth quarter gross domestic product (GDP) growth for 2023, and his estimate was 5.9 percent which was the same pace of growth in the third quarter.

On Friday, he said the emerging GDP numbers could be higher than 5.9 percent for the last quarter of 2023.

“I think it’s going to be better than Q3. The Q2 GDP (4.3 percent) is an aberration in terms of growth,” he said.

Remolona also said that given the latest estimate of a stronger 2023 GDP expansion – and the government target is six percent to seven percent – this may allow the Monetary Board leeway to adjust the key rate higher.

“If the growth is strong that gives us a bit more room to hike,” he told reporters. He has always said that the economy can absorb BSP’s elevated target reverse repurchase (RRP) rate which is the policy rate.

When asked to clarify the tightening bias when he also said that a rate cut is possible, Remolona said his basis was the neutral rate which showed them that the economy can absorb the 6.5 percent RRP rate.

Computing the real rate is arrived at by subtracting the current inflation rate to the key rate of 6.5 percent.

With a 6.5 percent policy rate and the latest inflation of 3.9 percent for December, the neutral rate is at 2.6 percent which indicates that the benchmark rate still has some room to increase without affecting growth.

“We’re neutral. This is based on our estimates of the natural rate. Natural rate we estimate (to be still low) but it’s not very precise … but it means we could hike and still be OK,” said Remolona.

The government will announce the fourth quarter GDP and full-year 2023 GDP on Jan. 31. The January CPI will be released on Feb. 6 but the BSP will announce its month-ahead inflation forecast on Jan. 30.

The first Monetary Board policy meeting for this year will be held on Feb. 15.

Stable financial system

During his speech at Bankers’ Night, the BSP chief said the inflation-targeting central bank continues to be a source of stability for the economy.

“We are not resting on our accomplishments. We deeply feel that we still have work to do. Indeed, we have outlined a reform agenda. It is an ambitious agenda, and we will need your help for most of it,” he told bankers on Friday.

Remolona, appointed as BSP’s seventh governor in July 2023, said he aims to focus on the following: to further enhance monetary policy framework by sharpening research, model, and non-monetary tools; and to be more responsive to inflation pressures, particularly during periods of unusual and large supply shocks.

“So far, the BSP managed to anchor inflation expectations and thus, effectively control second-round effects. Through our inflation-targeting framework, headline inflation has gone down to 3.9 percent as of December 2023, from a high of 8.7 percent in January 2023,” he noted.

As for banking supervision, the BSP chief said the objective is to “strengthen the way we conduct systemic risk oversight.”

“You saw what happened in March 2023 with Silicon Valley Bank and Credit Suisse. We don’t want this to happen to us. And for now, the banking system remains healthy, characterized by strong balance sheets, profitable operations, and sound performance indicators,” he said.

Remolona said the BSP financial stability mandates also has the “responsibility to deepen our capital markets.”

“This is meant to diversify the sources of funds in our financial system so that our businesses and our investments do not have to rely entirely on the banking system in case there is a credit crunch,” he said.

Lastly, he said the BSP sustainability initiative will be a prime focus for a “more meaningful by infusing it with an inclusion perspective.”

“We want to ensure that the entire financial system supports an inclusive adaptation program so that the burden of transmission does not fall on the most vulnerable segments of our society,” he said.

— Lee C. Chipongian