BSP sees less aggressive interest rate hikes as GDP slows down

The Bangko Sentral ng Pilipinas (BSP) sees room to be less aggressive in imposing interest rate hikes to tame inflation as overall economic production remained sluggish amid the Middle East crisis.

Speaking at the Economic Journalists Association of the Philippines (EJAP) Economic Forum in Manila, BSP Governor Eli Remolona Jr. admitted Friday that the country's reported 2.3% second quarter Gross Domestic Product (GDP) growth was disappointing.

The figure, Remolona said, could be closer to 3.2% after adjusting the previous year's comparison base. Nonetheless, he weaker growth gives the BSP leeway with regard to monetary tightening to fight rising costs of goods.

"The weaker growth that we're seeing means we can be less aggressive in trying to tame inflation," Remolona said.

"But in the face of an unpredictable opponent, oil prices, for example, we need to keep our eye on the ball," he added.

Monetary policy or interest rates are among the tools used by central banks to stabilize inflation by controlling the money supply by raising borrowing costs.

For example, the BSP sets the overnight reverse repurchase rate or the key policy rate, in which the central bank borrows from banks to maintain price stability.

This, in turn, impacts the country’s money supply as it shifts money from banks into the central bank.

READ: Higher policy rates: How are you affected?

The Central Bank chief expressed optimism over the inflation outlook as he cited the results of the Central Bank's recent Survey of External Forecasters.

The survey of 24 analysts conducted on July 23 showed steadily declining inflation expectations, from 5.4% in the next 12 months, 4.0% in 24 months, down to 3.3% in 36 months.

"This is reassuring. Even as we see global supply shocks' prices rise very sharply, we still expect that prices will come down," Remolona said.

Citing the expectation forecast figures, the BSP chief said, "That's not quite where we want to be but it's still reassuring."

July inflation stood at 6.2%, down from a peak of 7.2%, but still above the BSP's 2%-4% target range.

Remolona said food and energy prices remain major contributors to inflation amid global supply shocks, including higher oil prices linked to the conflict in the Middle East.

He said the BSP has limited ability to address inflation arising directly from global supply shocks, but can act on their second-round effects. — Sherylin Untalan/ VDV, GMA News