Inflation and the New BSP Governor

We can safely say that the Philippines has neutralized the high inflation rate that hounded us at the start of the year. Former Bangko Sentral ng Pilipinas Governor Felipe Medalla did a good job at taming prices and keeping the economy stable, and I am confident the new BSP chief will follow in his predecessor’s track.

Prof. Medalla skillfully guided the Philippine economy through a period of high inflation and other challenges that still allowed us to post one of the fastest growths in the region.

The job of the BSP chief is crucial to the economy. He must see to it that prices and the exchange rate are stable to preserve the purchasing power of the consumers. Former Governor Medalla, to me, performed creditably well. There is no doubt that his successor, seasoned banker and Monetary Board member Eli Remolona, will continue to keep an eye on inflation and interest rates to keep the cost of funds relatively low in the Philippines. I congratulate Gov. Remolona for his new job at the BSP after President Ferdinand Marcos Jr. appointed him to a six-year term.

The BSP kept interest rates steady in its policy meeting on June 22, 2023 in what could be an extended pause of its monetary tightening cycle, or a signal that it is preparing to backpedal and bring down the rates to levels supportive of economic growth.

Economists are debating on whether the US Federal Reserve should start hiking its rates again in the face of a still elevated inflation, but our own central bank believes a pause in rate adjustment is the best course at the moment given the easing of domestic inflation from a peak of 8.7 percent in January to 6.1 percent in May.

Before he left the BSP, Prof. Medalla was quoted as saying that an inflation rate below 3 percent would give the Monetary Board enough reason to cut interest rates by January or February 2024. This is good news for the business community and our small entrepreneurs. Cheaper funds will allow them to sell more and expand their businesses.

Our Cabinet economic team seems confident that the inflation rate will fall below 2 percent to 4 percent in the first quarter of 2024, or well below the government’s “target band.”

Governor Remolona, meanwhile, will steer our monetary policy in the next six years, a pivotal period in our goal to become an upper middle-income and later a high-income economy. This period will also determine if we can join the list of 20 largest economies in the world by 2050, as predicted by BMI, a research firm under the Fitch Group.

BMI forecast that the Philippines would become the 18th largest economy with a nominal gross domestic product of $2.3 trillion by that time. It would join other rapidly growing economies such as China, India, Indonesia, Bangladesh and Vietnam, as well as more established economies such as the United States, Germany, Japan, the United Kingdom and France.

The Philippines is already one of the largest markets with over 110 million consumers right now, and given its relatively young labor force, our country is expected to gain more purchasing power in the coming decades.

A bigger economy offers tremendous opportunities for the Filipino people. Among the sectors that are expected to benefit from the country’s ascension to the group of 20 largest economies are manufacturing, retail, property and real estate, banking, health care, education, automotive and transportation, travel and tourism, information technology and other services.

The much bigger economy is possible if the BSP, which has control of liquidity to manage inflation and foreign exchange rate, strikes a good balance between stabilizing prices and supporting growth. 

BSP officials are known for their analytical skills as they carefully weigh the pros and cons of any interest rate adjustment that can control inflation but stifle growth as a result, or boost business activities but trigger inflationary pressures.

That is why Governor Remolona’s appointment is a big deal for many economists and stock analysts. He has big shoes to fill as he inherits the job from noted economists like Prof. Medalla and Finance Secretary Benjamin Diokno, as well as career central bankers Amando Tetangco and the late Nestor Espenilla.

He is not new to the job, as he has been a member of the seven-seat Monetary Board, the policy-making body of the BSP, since August 2022. He served for 14 years at the Federal Reserve Bank of New York and for 19 years at the Bank for International Settlements. He was also an independent director of the Bank of the Philippine Islands before joining the Monetary Board.

I am confident his distinguished banking career will stand him in good stead when he steers the central bank in the next six years.