Best strategy on key policy rates is to wait – Medalla

FILE: Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla. (Photo: Felipe M. Medalla
@BSPGovMedalla/Twitter)

MANILA – Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla on Friday emphasized the need to observe how their counterparts will decide on key policy rates before the central bank adjusts its rates, noting that the BSP has done enough to keep Philippine inflation within target for the rest of the year.

“I think we really have to watch what the other central banks will do. If the only basis for the rates is Philippine inflation, we’re quite confident that we’ve already done enough,” he said in an interview over Bloomberg TV.

Citing the latest data, Medalla said inflation “is already back to normal.”

“We expect inflation, unless there are any surprises, to be below 4 percent by October or November. And we expect inflation next year to be very close to the midpoint of our target, which is 3 percent,” he said.

Even with central banks in advanced economies still considering more rate hikes, Medalla said “we’re unlikely to match them” since inflation has sustained its deceleration and “there’s little reason to raise (rates) and there’s little reason to cut.”

“This situation is likely to last for quite some time unless there’s new data that says otherwise,” he said.

Asked how long does he think the BSP can hold its key rates steady, Medalla said “if we see inflation below 3 (percent) let’s say as far as January or February that will be a good time to say, well, maybe we have room to cut.”

“Of course’s it’s hard to tell right now but my own view is we should be patient because there are two mistakes that we can make. One, is cut when we should not have and therefore reverse ourselves. That’s a terrible mistake. The other one is not cut when we should have. That’s an easy mistake to correct. All you have to do is do more in the next meetings,” he said.

With these scenarios, Medalla said “waiting is the better strategy.”

“Maybe the optimal waiting time is up to January to February if the current conditions remain,” he said.

Asked for the next priorities of the BSP, Medalla said the central bank has “done everything quickly” and these measures “are now being felt by the economy.”

He said the next programs should focus more on capital market developments, which include more trading of government securities, and more efficient payment system by maximizing the use of technology.

On Thursday, the BSP’s policy-making Monetary Board (MB) maintained for the second consecutive rate-setting meeting the central bank’s key policy rates on the back of expectations that inflation rate will return to within the government’s 2 to 4 percent target band starting in the last quarter of this year.

BSP’s 2023 average inflation forecast was even cut to 5.4 percent from 5.5 percent during the MB rate-setting meeting last May 18.

On the other hand, the 2024 projection was hiked to 2.9 percent from 2.8 percent on projections that the continued reopening and recovery of the economy will result in a faster rate of price increases.

For 2025, the forecast is 3.2 percent, a figure derived after assessing the possible path of interest rate and assumptions on wage adjustments, among others.

From January to May, this year, the rate of price increases sustained its downtrend after it slipped to 6.1 percent from April’s 6.6 percent. This is after the headline inflation rate peaked last January when it accelerated to its 14-year high of 8.7 percent.

The headline inflation rate in February was at 8.6 percent, and March was at 7.6 percent.

Meanwhile, asked whether he has been informed of his possible reappointment or replacement once his term ends on July 3, Medalla said no one has been informed about this.

He said President Ferdinand R. Marcos Jr. will probably make up his mind this week, “but I have no doubt that monetary policy will continue the way it has continued from one governor to the next.”

Medalla was appointed to head the BSP in May 2022 in place of former BSP Governor Benjamin Diokno, who was appointed by Marcos to head the Department of Finance (DOF).

He is just finishing the remaining term of Diokno, who, in turn, was appointed after the late BSP Governor Nestor Espenilla Jr. succumbed to cancer in February 2019.