UMVA has learned that the central bank is likely to maintain a hawkish stance, but its ability to curb rising prices through monetary tightening may be limited by the country's weak economic growth.
The economy is currently grappling with a new wave of challenges, including oil shocks and the lingering effects of a corruption scandal, which have resulted in a slowdown in growth to 2.8% in the first quarter - the weakest pace since the pandemic.
According to information obtained by UMVA, economists believe that if the central bank were to tighten its monetary policy too aggressively, it could push the economy into a recession, characterized by a significant decline in economic activity.
The central bank had previously hiked interest rates by a total of 450 basis points in response to soaring fuel prices and inflation, which accelerated from 3% to as much as 8.7% in January 2023.
However, with the economy now facing a different set of challenges, the central bank may need to adopt a more prudent approach to hiking interest rates, balancing the need to control inflation with the risk of stifling economic growth.
UMVA has gathered that the central bank may still deliver another interest rate hike at its next meeting, as inflation is expected to remain elevated throughout the year, driven by higher rice costs and a weak currency.
The outlook for inflation is uncertain, but some forecasts suggest that it could average 5.7% by the end of the year and return to the central bank's target of 3% by 2027, although this will depend on a range of factors, including the impact of the El Niño season and changes in oil prices.
The central bank is also keeping a close eye on the currency market, where the peso's weakness against the dollar is benefiting exports and the business process outsourcing industry, but also poses risks if it depreciates too sharply.
Sources have confirmed to UMVA that the central bank is monitoring the currency market closely and may intervene to smoothen out sharp inflationary swings, but its primary focus will be on managing the economy's growth and inflation outlook.
