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Next central bank governor signals at least two rate hikes

FELIPE M. MEDALLA / COURTESY OF BANGKO SENTRAL NG PILIPINAS

THE PHILIPPINES will likely follow its interest-rate increase last month with at least two more hikes to curb inflation, according to the central bank’s incoming governor.

“It’s almost a sure thing to everyone that we will raise in June,” Felipe M. Medalla, a board member of the Bangko Sentral ng Pilipinas (BSP) who is set to take over from Benjamin E. Diokno as governor on July 1, said in an interview on Tuesday. There is a “90% chance there’s another one in August. The real question is: Is that the last one?”

He said the successive hikes will lift the benchmark rate to 2.75% from 2.25% now — a level seen reached by the end of third quarter in the median of forecasts compiled by Bloomberg. Increases beyond that will be data-dependent, Mr. Medalla said.

The BSP is scheduled to review policy settings on June 23 and subsequently on Aug. 18.

The peso fell by 0.2% to 52.95 per dollar, approaching the lowest since January 2019. Local stocks rose by 0.5%.

Mr. Medalla will take the helm at BSP as its rate hike cycle picks up speed to ride out the inflation wave sweeping the world. Consumer prices rose an annualized 5.4% in May, data released on Tuesday showed, the fastest in more than three years and well above the bank’s 2%-4% target. 

The governor-designate also said the BSP need not move in lockstep with the US Federal Reserve, saying the nature of inflation in the Philippines is different from what the US is experiencing.

“Even if inflation is purely supply side, we are afraid there may be what we call second-round effects,” Mr. Medalla said in his first sit-down interview since accepting the nomination. Spillover inflation effects may materialize “if supply shocks are so prolonged.”

Second-round inflation has already materialized and the BSP wants to prevent a further buildup, Mr. Diokno said earlier on Tuesday after the latest inflation print. Both the incoming and outgoing BSP chiefs have signaled the need to tighten monetary policy after the lift-off in May. The policy prescription follows a clouded inflation outlook amid continued supply disruptions from Russia’s war in Ukraine that’s in its fourth month.

Philippines has among Southeast Asia’s quickest inflation. The peso slid last week to three-year low, potentially further fanning costs in a country that imports commodities from crude oil to wheat.

“Transmission of peso-dollar rate to inflation is quite low,” Mr. Medalla said, noting that the peso’s performance was better than the middle of the pack. He sees the Philippine economy growing at least 7% this year on the back of rejuvenated consumer spending as it recovers from the pandemic. — Bloomberg

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