New Philippine central bank head signals at least two hikes

·2 min read
Incoming Philippine central bank Governor Felipe Medalla. (Photographer: Geric Cruz/Bloomberg)
Incoming Philippine central bank Governor Felipe Medalla. (Photographer: Geric Cruz/Bloomberg)

By Siegfrid Alegado and Cecilia Yap

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 Medalla, a board member of the Bangko Sentral ng Pilipinas who is set to take over from Benjamin Diokno as governor on July 1, said in an interview 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, Medalla said.

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

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 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 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,” Medalla said in his first sit-down interview since accepting the nomination. Spillover inflation effects may materialize “if supply shocks are so prolonged.”

Incumbent Governor Diokno, who will move on to become the finance secretary and continue as a member on BSP’s board, said he is on the same page with Medalla on policy rate. His comments at Bloomberg’s Philippines: NEXT Summit in Manila on Tuesday came amid supply disruptions from Russia’s war in Ukraine clouding the inflation outlook.

Second-round inflation has already materialized and the BSP wants to prevent a further build up, he had said earlier in the day after the latest inflation print.

<insert chart here> Philippines tweaked its benchmark rate for the first time since 2020

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,” 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.

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