BSP hikes rates by 75bps as inflation outlook remains elevated

Bangko Sentral ng Pilipinas’ (BSP) policy-setting Monetary Board continued with its aggressive monetary policy tightening scheme as inflation is expected to remain elevated and well above the government’s target band.

“At its meeting on monetary policy today, the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase facility by 75 basis points to 5%, effective tomorrow,“ BSP Governor Felipe Medalla said at a virtual briefing on Thursday.

The latest policy rate hike comes after a policy tightening of 225 basis points so far this year — 50 basis points in September, 50 basis points in August, 75 basis points in an off-cycle hike in July, 25 basis points each in June and May.

Medalla made true his earlier pronouncement that the BSP will match the recent 75 basis points interest rate hike by the United States’ Federal Reserve.

Likewise, the Monetary Board raised the interest rates on the overnight deposit and lending facilities to 4.5% and 5.5%, respectively.

“In deciding to raise the policy interest rate anew, the Monetary Board noted that core inflation has risen sharply in October, indicating stronger pass- through of elevated food and energy prices as well as demand-side impulses on inflation,” Medalla said.

In October, inflation or the rate of increase in the prices of consumer goods and services accelerated to a near 14-year high of 7.7% from 6.9% in September as food prices remain elevated due to supply challenges brought by external pressures such as the Russia-Ukraine war and the onslaught of Typhoon Karding. 

READ: Higher policy rates: How are you affected?

Monetary policy or interest rates are among the tools used by central banks to stabilize inflation through controlling money supply by raising borrowing costs.

Higher borrowing costs could make consumers and businesses spend less, therefore reducing economic activity or lowering demand and eventually lowering prices.

Inflation outlook

In deciding to rate interest rates, Medall said the BSP also took into consideration is baseline inflation forecasts which “indicate a higher inflation path over the policy horizon.”

The central bank is expecting inflation to breach the upper end of the 2% to 4% target range for both 2022 and 2023, settling at 5.8% and 4.3%, respectively.

“At the same time, the risks to the inflation outlook lean strongly toward the upside until 2023 while remaining broadly balanced in 2024,” Medalla said.

The forecast for 2024 has also risen slightly to 3.1%.

“Upside risks are associated with elevated international food prices owing to higher fertilizer costs, trade restrictions, and adverse weather conditions,” the BSP chief said.

“On the domestic front, the impact of weather disturbances on the prices of fruits and vegetables, supply disruptions in key food commodities such as sugar and meat, as well as pending petitions for transport fare hikes could also exert upward pressures on inflation,” he added.

However, Medalla said the impact of a weaker-than-expected global economic recovery continues to be the main downside risk to the inflation outlook.

“Given the increased likelihood of further second-round effects, persistent inflationary pressures, and the predominance of upside risks to the inflation outlook, the Monetary Board recognized the need for aggressive monetary policy action to safeguard price stability,” he said.

“With the strong growth of the economy in the third quarter of 2022, domestic demand is seen to hold firm owing to improved employment outturns, investment activity, and consumer spending,” he added.

The economy as measured by GDP or the total value of goods and services produced accelerated by 7.6% during the July to September period, faster than the upwardly adjusted 7.5% GDP growth in the second quarter of the year. 

“On the other hand, a sizable adjustment in the policy interest rate will help insulate the economy from external headwinds and exchange rate fluctuations that could further entrench price pressures and potentially dislodge inflation expectations,” Medalla said.

Nonetheless, the BSP chief said the Monetary Board is also reassured by the timely non-monetary government interventions to mitigate the impact of persistent supply-side pressures on commodity prices, including those aimed at alleviating supply shortages and strengthening farm productivity.

“Looking ahead, the BSP will continue to take all necessary action to bring inflation back within the target band over the medium term, in keeping with its primary mandate to sustain price and financial stability,” he said. — RSJ, GMA Integrated News