The finance minister of the Philippines, Benjamin Diokno, has stated that the country’s central bank has no reason to raise interest rates further as domestic inflation is easing. Diokno’s opinion came ahead of a monetary policy meeting on 18 May.
The minister reiterated his stance against a rate hike but added that he was only one of seven monetary board members who will vote during the meeting. Some economists have penciled in a hike before the central bank takes a break from policy tightening. The central bank has raised rates by a total of 425 basis points since May last year to fight inflation, the full impact of which Diokno said has yet to be absorbed by the economy.
BSP’s forthcoming plan to reduce inflation to less than 4% by Q4 is expected, yet there is no definite consensus for a pause on May 18. BSP Governor, Felipe Medalla, stated that the incoming year will be one of prosperous growth and favorable inflation. Central bank officials have disclosed that their stringent tightening measures might abate local demand, which decelerated for the fourth consecutive month in Q1, contributing to the economy’s sluggish yearly extension in the initial three months of the year.
According to the International Monetary Fund (IMF), “a continued tightening bias may be appropriate until inflation decisively falls within the 2-4% target range” given the upside risks to inflation. Philippine annual inflation dropped to 6.6% in April after declining for three months in a row, according to the economic planning ministry, which also noted that it appeared to have peaked.
Diokno’s stance on refraining from raising interest rates further shows his conviction that more tightening is unnecessary given the declining pace of inflation. He has suggested that the economy has not yet fully adapted to the strong tightening by the central bank. The monetary board is divided on this issue, and some economists think that a rate increase is still required before a pause in tightening policy.
The economy’s growth prospects are optimistic, according to Governor Medalla, who predicted that “next year will be a year of good growth and good inflation.” However, the domestic demand, which slowed for a fourth consecutive month in the first quarter, could be dampened by the central bank’s vigorous tightening. The economy’s sluggish yearly expansion in the first three months of the year was a result of this.
The IMF has said that until inflation significantly falls under the target range of 2-4%, a prolonged tightening bias may be necessary. Philippine annual inflation dropped to 6.6% in April after declining for three months in a row, according to the economic planning ministry, which also noted that it appeared to have peaked. The BSP is anticipated to reduce inflation below 4% by the fourth quarter, but the monetary board cannot agree on whether a respite in the tightening of policy is required on May 18.
