EVEN against the backdrop of a weak local currency and the resurgence of global oil prices, the central bank still has to scrutinize more data on inflation, growth, exchange rate and capital flows as it must be sure to maintain ‘sufficient interest-rate support,’ according to a former Bangko Sentral ng Pilipinas (BSP) deputy governor.
‘The challenge for the BSP is to maintain sufficient interest-rate support without making the cost of capital so high that it begins to damage the very growth and investment that the economy needs,’ former BSP Deputy Governor Diwa C. Guinigundo told the BusinessMirror in a Viber message.
Asked if the central bank should continue raising interest rates given the weak local currency and high oil prices, Guinigundo said the BSP ‘should be data-dependent,’ hence the need to gather more data on inflation and growth, exchange rate and capital flows.
This, the former BSP deputy governor stressed, as he weighed the advantages of raising the policy rate further against the risks that would come with further tightening.
Guinigundo explained that a higher rate can strengthen the peso, anchor inflation expectations and support portfolio flows.
However, he pointed out that if the policy rate ‘stays high for too long,’ it can ‘unnecessarily suppress domestic demand, investment and employment.’
‘In short, a relatively high rate can buy monetary and exchange-rate stability, but it comes at a cost,’ added the former central bank deputy governor.
Moving forward, Guinigundo said it is more important to look at the real policy rate and interest-rate differential after adjusting for inflation and exchange-rate expectations rather than the nominal policy rate alone.
‘That distinction is particularly important now because the BSP is already dealing with both inflationary pressures and peso weakness; its recent decision explicitly cited the need to anchor inflation expectations and mitigate broader price pressures,’ he also told this newspaper.
In an earlier commentary, the former central bank deputy governor explained that the issue is not simply whether the BSP should raise, hold or eventually cut its policy rate.
‘The more fundamental question is whether monetary policy is sufficiently restrictive in real terms to bring inflation back to target and keep expectations firmly anchored,’ Guinigundo noted.
The Monetary Board, the highest policy-making body of the BSP, has raised the key interest rate by a total of 75 basis points since the start of the conflict in the Middle East, delivering three separate quarter-point rate hikes at the Monetary Board’s rate-setting meetings held on April 23, June 18, and August 27.
These policy actions brought the Target Reverse Repurchase (RRP) Rate to 5 percent.