Greater circumspection on monetary policy

PHILIPPINES - In Brief 03 Jun 2024 by Diwa Guinigundo

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When the Monetary Board of the Bangko Sentral ng Pilipinas (BSP or the Philippines’ central bank) concluded its May 2024 meeting on monetary policy two weeks ago, the stance of monetary policy was established, and it remained hawkish in view of the rising trend of price pressures and the upside risks driving them. However, the market was jolted when the BSP issued some pronouncements a couple of days after that one, that it had the flexibility to ease monetary policy before the US Fed action; two, a possible reduction in the policy rate as early as August; and three, the magnitude could be as much as 50 basis points (bps). Market observers and traders attribute the recent weakness of the Philippine peso precisely to this less hawkish statement on monetary policy outside the formal press statement of the Monetary Board which was unequivocally hawkish. Immediately, the peso reacted by dropping to P58.27. It was not to be some temporary weakness, but it is now ushering in a depreciating trend beyond P58 to a dollar. The peso closed May 2024 at P58.62 from April’s 55.63 to a dollar. If the weakness of the peso extends to a year with such magnitude, and with an exchange rate pass through of 0.08 percentage point (ppt) for every peso depreciation, we are looking at an additional inflation of 0.24 ppt. Two days from now, the May inflation would be announced by the Philippine Statistics Authority and the various analysts’ forecasts released varied within a narrow range. A high of 4.1% for 5 out of 16 analysts and a low of 3.8% for two out of 16 analysts sandwiched the median forecast of 4.0%. Against its own inflation target of 2%-4%, the BSP projected the May inflation rate a...