BSP: Rate hike unnecessary if inflation subsides

The sudden uptick in inflation last August would not necessarily call for an increase in interest rates as price increases due to supply shocks "usually dissipate" quickly, Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona said on Thursday.

But on the sidelines of the Alliance for Financial Inclusion Global Policy Forum in Pasay, Remolona said that the slight increase in inflation rate may only be momentary, and the pricing pressures that caused it will soon subside.

For context, the country's inflation increased for the first time in seven months in August, hitting 5.3% year-on-year from July's 4.7 percent rate.

"So if that's all there is, if there are no further supply shocks beyond that uptick in August, then it won't be necessary to hike the policy rate," Remolona said.

"It won't justify an easing but it won't be necessary to raise the policy rate," he added.

In remarks made before the central bank's policy meeting on 21 September, Remolona mentioned that Philippine inflation should reach the target range of 2 percent to 4 percent by October, barring any more supply shocks.

However, the BSP chief said that hitting the target range "is not enough."

"We want to be comfortably within the target range for the year or so to follow," Remolona said.

He said the bad news is that inflation faces risks on the upside. These include increases in transportation costs, increased salary adjustments, restrictions on the availability of food, and the El Niño phenomenon, which is already affecting drought in the nation's Asian neighbors, particularly Vietnam, from where the government buys rice.

"We're really, really serious about price stability," Remolona said.

"In deciding on what to do with the policy rate, we look at whether we're comfortable with the target range," he added.

In terms of monetary policy, the BSP is currently in a "hold" position. However, Remolona always indicates a hawkish or tightening tilt if inflation is still over the target.

For the previous three policy sessions in a row, the benchmark rate has remained at 6.25 percent. The hiatus in the monetary tightening cycle has given BSP some time to assess the state of the markets following the rash rate hikes.