The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) on Thursday decided to continue with its policy tightening, bringing key policy rates to levels last seen in 2007.
BSP Governor Felipe Medalla said the 50-basis-point adjustments would take effect on Friday, February 17, bringing the overnight reverse repurchase rate to 6.0%, the overnight deposit facility rate to 5.5%, and the overnight lending facility rate to 6.5%.
The benchmark rate is now the same as the levels last seen 15 years ago in July 2007, and is the highest since it was recorded at 7.5% in May of the same year.
“In deciding to raise the policy interest rate anew, the Monetary Board noted that the latest baseline inflation forecast path has shifted higher relative to the previous assessment,” he said at a briefing in Manila City.
The Monetary Board now expects inflation to average 6.1% this year, higher than the previous projection of 4.5% during the December policy meeting. It also hiked its 2024 projection to 3.1% from 2.8%.
“The forecasts were adjusted upwards following the higher-than-expected inflation outturn in January as well as the continued stronger rebound in domestic demand and gross domestic product growth in Q4 2022,” Medalla said.
The country's GDP grew 7.2% in the fourth quarter of 2022, bringing the full-year economic growth to 7.6%.
Meanwhile, inflation clocked in at a 14-year high of 8.7% in January, higher than the central bank’s projection of 7.5% to 8.3% and the target range of 2.0% to 4.0%.
“Both headline and core inflation measures have also continued to increase, indicating a further broadening of price pressures, particularly in services,” Medalla said.
“Meanwhile, inflation expectations have likewise risen further, underscoring the need to preempt the emergence of further second-round effects,” he added.
Medalla in December projected two 25-basis-point hikes in the first two policy meetings for 2023.
During the briefing, Medalla said another hike is likely at the next policy meeting on March 24.
"If I had to make a choice, I would say I’d rule out zero and I’d rule out 75 (basis points). I think we have done enough 75s," he said, noting that he personally does not think a 75-basis-point hike is needed unless the US Federal Reserve does the same.
Medalla also said that a reduction in the reserve requirement could still be possible in the first half of the year. The reserve requirement is the amount of cash a bank must keep in reserve against deposits made by clients in the Philippines.
“I still think cutting the reserve requirement is still feasible before the end of the first semester,” he said.
Medalla said in December that the possibility of a single-digit reserve requirement ratio—a target that was previously set by his predecessor, former Governor and now Finance Secretary Benjamin Diokno—could still be realized by the end of his term in July 2023.
Medalla is currently serving the unexpired term of Diokno, who was supposed to complete the remainder of the term of former Governor Nestor Espenilla Jr., who passed away in February 2019.
Espenilla said in 2017 that he personally wanted to see the reserve requirement cut by half under his leadership. — VBL, GMA Integrated News