BSP hikes rates by 25 bps to counter inflation spike amid Middle East crisis

The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) on Thursday decided to hike key policy rates, effectively ending its easing cycle, in a bid to counter the anticipated inflation spike brought by the global oil price shock amid the Middle East war.

At a briefing, BSP Governor Eli Remolona Jr. announced that monetary authorities decided to tighten rates by 25 basis points, bringing the target reverse repurchase rate at 4.5%, the overnight deposit rate to 4%, and the overnight lending rate to 5%.

“Guided as always by our primary mandate to keep inflation low, which supports balanced and sustainable economic growth. Today, the Monetary Board decided to raise the BSP’s key interest rates by a quarter of a percent… The reason is clear, the inflation outlook has deteriorated amid the ongoing conflict in the Middle East… higher oil and fertilizer prices are expected to spill over to food prices and services,” Remolona said.

“This can cause inflation to become persistent, hurting households as well as businesses,” the BSP chief said.

The central bank chief said latest projections now indicate a higher inflation path as inflation rate is seen to breach the 4% “tolerance ceiling” in both 2026 and 2027. 

“This measured increase is intended to contain the build up of spillover effects and keep inflation expectations anchored,” Remolona said.

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

For example, the BSP sets the overnight reverse repurchase rate or the key policy rate, in which the central bank borrows from banks to maintain price stability.

This, in turn, impacts the country’s money supply as it shifts money from banks into the central bank

“The policy rate increase is intended to anchor inflation expectations and contain the buildup of second-round effects. A measured increase in the policy rate will still accommodate economic recovery over the medium term,” Remolona said.

“Looking ahead, the Monetary Board will continue to be guided by incoming data. The BSP stands ready to take all necessary monetary actions to ensure that inflation returns to the 3% target, consistent with its primary mandate of maintaining price stability,” he said. — BM, GMA News