BSP lifts key rate by 25 bps to 2.5%


As expected by the market, the Monetary Board, the policy making body of the Bangko Sentral ng Pilipinas (BSP), has raised the benchmark rate by another 25 basis points (bps) to 2.5 percent on Thursday, June 23, with upside risks to inflation now detected up to 2023 due to persistent higher oil prices.

Outgoing BSP Governor Benjamin E. Diokno also announced higher average inflation forecasts for 2022 of five percent, 4.2 percent for 2023 and 3.3 percent for 2024. These are higher than previous estimates last May 19 of 4.6 percent and 3.9 percent for 2022 and 2023. This was the first time the BSP released an inflation forecast for 2024.

BSP building and logo/Reuters

In a press briefing after the Monetary Board policy decision, BSP Deputy Governor Francisco G. Dakila Jr. said inflation will average at 5.6 percent in the second half of 2022 because of continued increase in the global commodity prices and a more entrenched second-round effects to inflation.

“Inflation is likely to remain above the target range (of two percent to four percent) until the first half of 2023 before decelerating (back to within the target) as both global oil and non-oil prices taper off,” Dakila told reporters.

Both Diokno and Dakila noted that the risks to inflation outlook are also now tilted to the upside not only for this year but also extended to 2023 before “balancing out in 2024.”

Possible sources of upside pressures are continued higher fuel costs, the shortage of domestic fish supply and additional transport fare hikes due to the rising oil prices.

Meantime, in revising the inflation forecasts for this year and in 2023, the BSP took into consideration the higher-than-expected inflation rate for the month of May of 5.4 percent. The emerging June inflation is also on the high side, said Dakila.

The BSP’s updated Dubai crude price assumptions is $106.30 per barrel for 2022, $95.30 for 2023 and $84.10 for 2024. These are higher compared to its May 19 projections of $103 per barrel for 2022 and $89.50 for 2023.

However, Dakila said that if Dubai crude were to fall to $90 per barrel in 2023 –“then that will be the threshold (and) we can expect inflation to decelerate to within the target in 2023.”

As for the depreciating peso vis-à-vis the US dollar, Dakila echoed what incoming BSP governor, Monetary Board member Felipe M. Medalla, said earlier that the peso is not inherently weak but similar with other currencies in the region, the local currency is depreciating due to the strength of the US dollar.

The US Federal Reserve policy normalization is favoring a strong US dollar. On Thursday, the peso closed weaker at P54.7 from P54.47 on June 22.

Effective June 24, Friday, the BSP’s overnight reverse repurchase rate is 2.5 percent, while the interest rates on the overnight deposit and lending facilities are two percent and three percent, respectively.

Diokno said inflation expectations have continued to rise.

“The Monetary Board believes that a follow-through increase in the policy rate enables the BSP to withdraw its stimulus measures while safeguarding macroeconomic stability amid rising global commodity prices and strong external headwinds to domestic economic growth,” he said.

“In line with the ongoing normalization of its monetary policy settings, the BSP is prepared to take all necessary policy action to bring inflation toward a target-consistent path over the medium term and deliver on its primary mandate of price stability,” he added.

Both Diokno and Medalla has signalled a possible 25 bps rate hike on Aug. 18, its next Monetary Board policy meeting. This will raise the key rate to 2.75 percent and the third time in a row that the BSP will hike the rates in 2022, after May 19 and June 23.