BSP says may hike rates if...

MANILA — Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona said the central bank would only raise rates if there were new supply shocks on inflation. 

Remolona made the statement in an interview with Nomura economist Euben Paracuelles

“If we have new supply shocks on inflation, which are unusually large, and if El Niño turns out to be very severe and combined with a confluence of other factors, we would have to tighten again,” the BSP governor said when asked what would trigger a resumption of the hiking cycle.

“Headline inflation is at 4.7 percent year-on-year, and we want to get to the target of 2 to 4 percent. But we also want to be comfortable that inflation is staying within that range and inflation expectations remain anchored,” he noted.

“If we don’t tighten when those shocks materialize, then expectations could get out of hand, inflation will feed on itself, and it gets much harder for us,” he explained.

Asked if policy settings would be kept stable if no supply shocks happen, Remolona said, “The pause means the signals from the data are still mixed and not consistent. Some indicators show the economy is holding up, some show it is weakening.”

“If this continues, then it’s likely prudent for us to still pause,” he said.

Remolona said the BSP would be cautious about cutting rates.

“If there’s a chance that we might have to raise rates again after we start cutting, we don’t want to take the risk from these quick reversals. I think the exit has to be a smooth process and this is what central banks have learned over the years. Sudden reversals are bad,” he said.

Inflation further eased for a sixth consecutive month in July. The BSP has said it remained ready to adjust the monetary policy stance if necessary to ease price pressures.

Easing inflation has allowed the BSP to keep rates steady at 6.25 percent during its last policy-setting meeting. The next meeting is on August 17.