Philippines to raise rates gradually, new central bank head says

The Philippines' incoming central bank head said interest rates will only rise gradually, even as the nation contends with global inflationary pressures.

"One does not want to overuse the interest rate tool," Felipe Medalla said at a June 29 press briefing. "Gradualism is also more consistent with banks not being surprised" along with their customers, said Medalla, who takes over as governor of Bangko Sentral ng Pilipinas on July 1.

The approach contrasts with that of the U.S. Federal Reserve, which hiked rates by 75 basis points earlier this month, the most in 28 years, as sanctions on Russia and COVID-19 supply-chain disruptions spurred inflation worldwide. Policymakers in the Philippines have raised rates to 2.5% following 25-bps increases in May and June to help tame the steepest price increases since December 2018.

Lenders in the Philippines are also strong enough to weather inflationary pressures as the economy rebounds from COVID-19 upheavals, Medalla said. The nation's consumer price index reached 5.4% in May, according to government data.

"I'm quite confident that the banks will remain strong and that their strength will actually improve as the economy recovers," Medalla said. Local banks are "by and large, more than adequately capitalized."

Bank lending

Bank lending is also beginning to normalize and will likely exceed pre-COVID-19 levels by next year, Medalla said. Total loans grew 5.8% in the year ended March 2022 versus a drop of 3.9% in the preceding 12 months, according to central bank data. The nonperforming loan ratio fell to 4.1% from 4.2%. Banks' aggregate first-quarter net profit rose 26.3%.

Medalla is taking over as central bank governor after Benjamin Diokno was tapped to head the Department of Finance under incoming President Ferdinand Marcos Jr. He will serve out the remainder of Diokno's term, which runs through July 2023.