Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona, Jr. recently expressed concern about further “financial accidents” that may be brought on by the strong rate increases implemented by the US Federal Reserve to combat inflation.
In a media advisory, the BSP chief said that the US central bank’s tightening cycle could result in more unpredictable financial markets and bank closures.
According to Remolona, “I believe that high-interest rates make the floor slicker for banks, increasing the likelihood of slips and accidents. Silicon Valley Bank, First Republic Bank, and Credit Suisse of Switzerland all failed at the height of the US Fed’s tightening cycle.”
He further said that “the FOMC has been even more aggressive this time than it was in 1994. Therefore, I am concerned about what might occur in the future because of this. SVB and Credit Suisse are already in view. The possibility of such financial mishaps worries me.”
IMAGE CREDIT: www.bsp.gov.ph
Remolona, a central banker who now has over 33 years of experience, claimed that the Fed rates have been aggressively raised since last year as opposed to the penultimate increase of 75 basis points in 1994, which sparked the “Tequila crisis” in 1995 and the Asian financial crisis in 1997.
In March last year, the US Federal Reserve raised its benchmark interest rate by 525 basis points, or from 0.25 percent to 5.50 percent.
To control inflation and stabilize the peso, which fell to an all-time low of P59 to the dollar in October last year, the BSP Monetary Board in the Philippines boosted interest rates by 425 basis points between May 2022 and March 2023.
The BSP has maintained a hawkish pause by keeping interest rates steady since May this year despite the downward trend in inflation and the slower-than-expected growth in the second quarter of the country’s Gross Domestic Product (GDP).
The BSP now anticipates easing back into its two to four percent target range from the fourth quarter of this year to the first quarter of next year.
“We are not entirely certain yet about the fourth quarter of 2023. We will continue to examine how the demand side of the economy has been affected by our tightening measures,” said the BSP governor.
After quickening to 5.3 percent in August from 4.7 percent in July, inflation for the eight months averaged 6.6 percent, which is still above the 2% to 4% goal range. Before August, inflation had decreased for six consecutive months after reaching a 14-year high of 8.7 percent in January of the previous year.
“We could increase the policy rate from 6.25 percent to a higher policy rate if inflation remains a problem. We won’t need to tighten any further if we believe that the current level of tightness is already highly effective,” the BSP governor added.
When he was appointed by the president for a six-year term as BSP governor last June, Remolona had promised to maintain the openness and independence of the central bank. “The BSP wishes to maintain independence in the areas of banking supervision and payment systems. But independence doesn’t imply silence or lack of coordination. We still have a lot of areas where we need to work with the national government,” he was quoted as saying then.
“When we discuss central bank independence, the operational independence — that is, the determination of monetary policy — is that part that can not be negotiated. We don’t want other branches of the government to instruct us on when to slow down, increase, or even take a break. Therefore, that is entirely up to us,” he further declared.
Remolona also claimed that the BSP is pushing a Senate-pending bill that has already been passed by the House of Representatives, which will grant the central bank access to director and officer bank accounts, the bank accounts of those engaged in phishing and fraud, as well as stockholders and related interests (DOSRI).
Due to the complexity of the tax regulations governing investments in financial instruments, the central bank also aims to simplify the laws and regulations governing financial accounts.
Finally, the BSP chief also said that he wants to strengthen the strategies for sustainability and financial inclusion, deepen the capital markets generally, to increase the liquidity of the money and bond markets while creating a good yield curve to help with the pricing of longer-term instruments (like mortgages), while improving the transmission of monetary policy.