Philippines Holds Interest Rate at 6.50% Amid Inflation

The Central Bank’s Unchanged Interest Rate

Amidst economic turbulence and inflationary pressures, the central bank of the Philippines has made a decisive move by keeping its key interest rate steady at 6.50%. This marks the second consecutive meeting where the rate has remained unchanged, a decision supported by 23 out of 24 economists surveyed by Bloomberg. This action underscores the central bank’s commitment to controlling inflation, which, although eased to 4.1% in November from 4.9% in the previous month, still hovers above the 2%-4% target range.

The Bangko Sentral ng Pilipinas (BSP) is taking a cautious approach, as it closely monitors the impact of its previous aggressive 450 basis points of tightening on the economy. The bank’s governor, Eli Remolona, emphasizes the importance of maintaining tight monetary policy settings to anchor inflation expectations firmly within the target range. This vigilant stance is further justified by the potential inflationary threats posed by transport charges, electricity rates, and oil prices, as well as the unpredictable global recovery and government measures in response to El Nino weather conditions.

Despite the US Federal Reserve signaling a potential pivot to rate cuts next year, the BSP has ruled out easing its stance due to persistent inflation risks. This is reflected in the slightly lowered risk-adjusted inflation outlook for 2024 to 4.2% from 4.4%, while retaining the 2025 projection at 3.4%. Governor Remolona flagged several price risks, including the possible impact of the El Nino phenomenon on food costs and a potential resurgence in oil prices.

Economic Growth and Currency Strength

The Philippines’ economic growth remains robust, with the country’s gross domestic product accelerating to 5.9% in the third quarter. However, analysis by Pantheon Macroeconomics suggests a potential slowdown in economic growth for the Philippines in 2024, projecting a growth rate of less than 5%—the lowest since 2011, excluding the Covid-19 years. This prediction highlights concerns about how the tighter monetary policy and economic conditions might impact consumer spending and overall economic momentum.

In the currency market, the peso has shown resilience, strengthening against the dollar by 0.6% to 55.70 and marking a 1.6% increase in the quarter. This fortification of the local currency can be partly attributed to the influx of overseas remittances during the year-end holidays. The stronger peso provides the BSP with additional flexibility to maintain its current monetary policy stance without exacerbating inflationary pressures through imported goods.

The central bank’s focus remains on balancing the need to support economic growth while ensuring that inflation does not derail the economy’s stability. This delicate equilibrium is essential for maintaining consumer confidence and the overall health of the Philippine economy.

Comparing Monetary Policies: Philippines and Mexico

While the central bank of the Philippines holds its interest rate steady, it’s interesting to compare its approach with that of the Bank of Mexico (Banxico), which has also maintained its benchmark interest rate at 11.25% for the sixth consecutive monetary policy meeting. Banxico has reiterated the need to keep the rate at this level “for some time” to bring inflation down to its 3% target, forecasting that inflation will converge to this target in the second quarter of 2025.

Banxico’s decision, made unanimously by its five-member board, echoes a similar sentiment to that of the BSP, highlighting the global challenge central banks face in managing inflation without stifling economic growth. Mexico’s annual headline inflation has shown signs of slowing, dipping to 4.26% in October, the lowest level since February 2021, before ticking up slightly to 4.32% in November.

Both central banks are refraining from signaling the start of a rate-cutting cycle, despite neighboring countries like Brazil and Chile experiencing easing inflation. This indicates a regional trend of caution among monetary authorities, as they navigate the complex interplay of economic recovery, inflationary pressures, and external uncertainties.

Key Points to Remember:

• Interest Rates: The Philippine central bank holds its key interest rate at 6.50%, while Banxico maintains its rate at 11.25%.
• Inflation: Both countries are dealing with inflation rates above their respective targets, prompting central banks to adopt a cautious stance.
• Economic Growth: There are strong growth expectations for the Philippines, but concerns about a potential slowdown loom in 2024, while Mexico is making progress in controlling inflation.

The financial landscape in the Philippines and Mexico reflects a broader pattern of cautious monetary policy across emerging markets, as central banks strive to strike a balance between fostering economic growth and containing inflation. The decisions made by these monetary authorities will have significant implications for their economies as they navigate through uncertain global economic conditions.