The Bangko Sentral ng Pilipinas (BSP) on Friday, Aug. 5, said that the last three policy rate increases which lifted the benchmark rate to 3.25 percent will help curb inflation in the medium term.
“The upward adjustment in monetary policy rates in May and June and the off-cycle adjustment in July should help moderate inflation expectations,” said the BSP after the government’s announcement that July inflation climbed to 6.4 percent versus 6.1 percent in June. The latest inflation is at the top range of the BSP’s forecast of 5.6 percent to 6.4 percent, and higher than its midpoint projection of six percent.
BSP Governor Felipe M. Medalla has signalled that the Monetary Board, its policy-making arm, will again raise the policy rate from 3.25 percent to 3.5 percent or even as high as another 50 basis points (bps) to 3.75 percent this month.
However, on Friday, after the inflation hit the high end of the BSP forecast, the central bank reiterated its support for “carefully coordinated efforts” of the BSP and other government agencies “to mitigate the impact of persistent supply-side factors on inflation” via non-monetary interventions.
“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,” it reiterated.
The Monetary Board will review its inflation outlook and policy rate on Aug. 18. Other than the July inflation rate, a crucial indicator of how much rate increase will be decided on, is the second quarter GDP results which will be announced on Aug. 9.
Meanwhile, the BSP said the July inflation remains consistent with its review and assessment of elevated price pressures over the near term because of “firmer” evidence of second-round effects.
“The BSP recognizes the broadening of price pressures amid the emergence of second-round effects, including the approved wage and fare hikes as well as elevated inflation expectations,” it said.
Risks to the inflation outlook is broadly balanced in 2024 but tilted on the upside for this year and in 2023. Upside risks over the near-term still come from the higher global non-oil prices due to the ongoing Ukraine war with Russia. The impact of higher oil prices on the prices of goods and services have potential second-round effects to inflation. Another upside risk is domestic food prices due food supply shortages.
As for downside risk to the inflation outlook, these remain the slower-than-expected global recovery amid tighter global monetary policy conditions and the pandemic-related uncertainties.
As of June 23, the BSP forecasts average inflation of five percent for 2022, 4.2 percent for 2023 and 3.3 percent in 2024.
Medalla said last week that with the 125 bps adjustments to the policy rate since May, the inflation will likely return to within the target range of two percent to four percent next year instead of 2024.
The central bank’s signalled rate hike this month may be enough to ensure that high inflation will be back to below four percent by 2023.
The BSP's main responsibility is to keep money, banking and credit in line with its with primary objective of preserving pirce stability. Price stability, which refers to a condition of low and stable inflation, ensures sustainable economic growth.