BSP to ensure sustainable recovery before tightening

THE BANGKO SENTRAL ng Pilipinas (BSP) may consider hiking its key interest rate in June if economic growth and employment data show recovery is now entrenched, its governor said.

“We really have to balance whether the recovery that we are seeing is sustainable. That’s why we are going to wait for the GDP (gross domestic product) number for the first quarter,” BSP Governor Benjamin E. Diokno said when asked by ABS-CBN News Channel if the BSP is prepared for the possible consequences of raising interest rates by June.

“By [June]…we’ll also have more data on employment, whether employment continues to improve, and so forth, and [if] those things suggest that the recovery is sustainable, maybe we will act accordingly under these cases,” he added.

First-quarter GDP data is expected to reflect the impact of looser pandemic restrictions as coronavirus disease 2019 cases dropped. Metro Manila and other parts of the country have been under a more relaxed Alert Level 1 since March.

The government is targeting a 7-9% GDP growth this year.

The jobless rate stood at 6.4% in February, unchanged for the second straight month. However, the number of unemployed Filipinos in absolute terms increased by 201,000 on a monthly basis to 3.126 million.

The Philippine Statistics Authority will release first-quarter GDP data on May 12, while the Labor Force Survey for March and April will be out on May 6 and June 10, respectively.

The BSP has kept its policy rate at a record low of 2% since November 2020. The Monetary Board will have a rate-setting meeting on May 19.

Mr. Diokno last week said they may consider starting to increase rates at the next policy meeting on June 23 as they expect strong first-quarter growth. He previously signaled a possible rate hike in the second half.

Some major central banks like the United States and United Kingdom have already tightened monetary policy to curb soaring inflation, but Mr. Diokno said the Philippines’ case is different.

“Their inflation is much more intense than ours. So, there’s a big difference between what’s happening in other countries than the Philippines,” he said.

“You really have to look at interest rate differential in real terms. Knowing that they are coming from such a high level of inflation, it would appear that the inflation level [in these countries] is kind of entrenched because it’s broad based. They have real estate prices going up, they have minimum wage going up because of constraint labor supply,” Mr. Diokno added.

The US Federal Reserve is expected to fire a 50-basis-point (bp) hike this week following its 25-bp increase in March.

Headline inflation in the Philippines rose to a six-month high of 4% in March due to surging oil prices brought by the war in Ukraine. The BSP has already raised its inflation forecast for the year to 4.3%, which is beyond the 2-4% target range.

April inflation likely quickened further to 4.6%, based on the median estimate of a BusinessWorld poll of 17 analysts. Inflation data is scheduled to be released on May 4.

Mr. Diokno said the BSP continues to monitor possible second-round effects of inflation from the demand side.

“We [the government] targeted those who are directly affected by [rising] oil prices, rather than a more general approach like cutting the tax on oil, which benefits everybody, the rich, poor, and middle income. So I think we do not expect second-round effect, but we closely monitor them every time we meet,” Mr. Diokno said.

Groups have filed petitions to raise transport fares and wages following the spike in oil and commodity prices.

EXPERIMENTAL CBDC
Meanwhile, Mr. Diokno said the pilot launch of the wholesale central bank digital currency (CBDC) is planned within the fourth quarter.

“We are going to do this on experimental basis, which will start in the fourth quarter of this year. We will experiment with some large financial institutions, limited in the Philippines,” he said.

Mr. Diokno said several banks have expressed intention to participate in the pilot program. The BSP is still open to accept those who want to join the pilot run.

Consultations with other institutions like the Monetary Authority of Singapore and the Bank for International Settlements have been done to ensure the smooth launch of the CBDC project, he added.

Last week, Mr. Diokno said the pilot project will cover the experimental CBDC use to allow large value financial transactions on a 24/7 basis. — Luz Wendy T. Noble