BSP to go easy on raising rates despite high inflation

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) will take a less aggressive approach to raising interest rates as it weighs above-target inflation against an economy that is struggling to gain momentum, BSP Governor Eli Remolona Jr. said.

Speaking at a forum organized by the Economic Journalists Association of the Philippines on Friday, Remolona said the economy continues to operate below its potential, with a negative output gap indicating weak demand and spare capacity.

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This, as the economy expanded just 2.3 percent in the second quarter against its growth potential of about 6 percent.

It was the weakest quarterly growth rate in 16 years outside the pandemic, putting the Marcos administration’s target of 3.5-percent to 4.5-percent growth this year increasingly out of reach.

“Negative output gap means we become less aggressive in terms of raising the policy rate in order to tame inflation,” he said. “Weak growth remains a consideration.”

The central bank has raised its benchmark interest rate by 50 basis points since April, taking the key policy rate to 4.75 percent.

The increases were intended to keep inflation expectations anchored as price pressures persisted, even as economic growth began to weaken.

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As it is, inflation has eased in recent months but remains well above the central bank’s 3-percent target. Consumer prices rose 6.2 percent in July from a year earlier, extending a three-month deceleration as transport costs declined. Core inflation, which strips out volatile food and energy prices, also eased to 4.2 percent from 4.4 percent in June.

READ: Inflation eased further to 6.2% in July

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The softer economic data have raised the prospect that the BSP could slow the pace of rate increases or put them on hold.

For policymakers, the challenge is to prevent inflation from becoming entrenched without pushing already-weak demand lower.

Asked if the BSP may hit the pause button at its Aug. 27 policy meeting, Remolona said: “It’s always a possibility.”

“Depending on how strong the price pressures seem to be, looking at expectations, looking at how the other items in the CPI [basket] respond to the continuing global shocks—it will all affect our policy strategy,” he added. INQ