THE NEW Bangko Sentral ng Pilipinas (BSP) chief sees inflation returning to the 2-4% target range before the year ends.

“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,” BSP Governor Eli M. Remolona said during the turnover ceremony and the BSP’s 30^th anniversary event at its head office in Manila on Monday.

Mr. Remolona takes over the central bank after his predecessor Felipe M. Medalla led an aggressive monetary tightening campaign to curb inflation.

From May 2022 to March this year, the BSP has raised interest rates by 425 basis points to combat inflation. This brought the policy rate to 6.25%, the highest in nearly 16 years.

Mr. Medalla, who served 11 years as a Monetary Board member and one year as BSP governor, said the past year “was a year like no other” as the central bank faced unprecedented challenges and fought record-high inflation.

“We acted decisively. We also sold foreign exchange as necessary… Combined with non-monetary measures, our actions helped reduce second-round effects and re-anchor inflationary expectations,” he said.

Mr. Medalla noted that the Philippines may see 18 straight months of inflation being above the 2-4% target from April 2022 to September 2023. This is three months longer than the longest record of 15 months in 2008 to 2009.

“Unless there are new shocks, we should see inflation below 4% before the end of this year,” he said.

The BSP sees full-year inflation averaging at 5.4%, before further slowing down to 2.9% in 2024.   

Also, Mr. Remolona said the country’s banking system remains strong.

“Capital and liquidity have been more than adequate. That’s why, in recovering from the pandemic, our banks have been a source of strength, unlike in previous crises, when they were a source of weakness,” he said.

Based on central bank data, the combined net profit of Philippine banks rose by 45.6% to P96.62 billion as of end-March from P66.34 billion in the same period in 2022.

“The plumbing of our system — our payments and settlement system — has increasingly become digitalized and efficient. We are delivering greater and greater access to financial services for our people,” Mr. Remolona said.

The BSP is aiming to have 50% of retail payments done digitally and 70% of adult Filipinos become part of the formal financial system by 2023.

The central bank reported that the share of online payments in the total volume of retail transactions in the country stood at 42.1% in 2022, while the country’s banked population was at 56% of all adults in 2021. — KBT

THE PHILIPPINE central bank intends to complete the conduct of climate stress testing in collaboration with the World Bank this year.

The Bangko Sentral ng Pilipinas (BSP) on Monday launched its first sustainability report, which details the progress in pursuing the sustainability agenda in the financial system.

In the report, the BSP said it plans to issue detailed guidelines for banks in conducting their own climate stress testing using their own data. 

“The exercise will also inform the enhancement of prudential reports submitted by banks to capture identified data relevant for surveillance of aggregate exposures of the banking system to climate and other environment-related risks,” it said.

The BSP is also looking to update sustainability reporting requirements in the financial sector. This will take into account the final version of reporting standards to be released by the International Sustainability Standards Board.

The central bank is also considering other potential regulatory incentives for banks to promote green lending “such as the use of preferential rediscount rates or provision for higher loan values related to its rediscounting facility.”

“The BSP is also reviewing the single borrower’s limit (SBL) regulations to promote lending to social and green projects under the Sustainable Finance Framework of the (National Government), among others,” it said.

Last month, the BSP proposed an additional SBL of 15% for loans meant to finance green projects and a reserve requirement rate of zero percent for sustainable bonds. 

If approved, the draft circular will amend sections 362 and 251 of the Manual of Regulations for Banks that cover exposure limits to a single borrower and reserves.

The SBL is a ceiling on the amount of loans, credit accommodations and guarantees a bank or financial institution can extend to one borrower meant to prevent over-concentration of risk.

The BSP said it is working with the Securities and Exchange Commission and the Insurance Commission in developing the sustainable finance taxonomy guidelines with the support of the World Bank.

“This taxonomy will build on the Philippine Sustainable Finance Guiding Principles, the country’s nationally determined contributions, and the ASEAN (Association of Southeast Asian Nations) taxonomy,” it said.

The BSP will also continue to improve the earlier-implemented green initiatives in its own offices and facilities and operations. It will also ensure effective implementation in the emission reduction initiative.

Meanwhile, the central bank said the inflationary effects of “temperature shocks” in the short term would be best addressed by non-monetary policy interventions, not monetary policy.

“On the other hand, if inflation pressures remain persistent and evidence of second-round effects materializes, the central bank will respond and adjust its policy interest rates accordingly,” it added.

The BSP monitors climate-related developments as part of its 11-point sustainability agenda. This includes weather disturbances such as the El Niño and storms that may damage crops or livestock, thus affecting supply and threatening price stability.

The state weather agency earlier said the El Niño weather phenomenon may emerge this month with an 80% probability and will likely persist until the first quarter of 2024. The last time an El Niño event hit the Philippines was in 2019, with agricultural damage reaching up to P8 billion.    

The central bank said it is currently conducting a study that examines the effects of temperature shocks on economic growth and inflation.

This is the first attempt to quantify the macroeconomic effects of temperature shocks in the Philippines and may serve as the starting point in understanding the wider consequences of climate change, the BSP said. 

“To the extent that climatic changes affect agricultural production, this would affect the level and volatility of inflation. Nevertheless, the impact of climate-related risks to price stability can be mitigated by well-timed and targeted interventions of the NG,” it said. — Keisha B. Ta-asan