BSP hikes policy rate to 3.75%

Published August 18, 2022, 4:14 PM

by Lee C. Chipongian

The central bank’s Monetary Board tightened the key borrowing rate anew by 50 basis points (bps) on Thursday, Aug. 18, to 3.75 percent from 3.25 percent n a market-anticipated policy action to control high inflation and stabilize the exchange rate amid risks of further second-round pressures.

This was the fourth time since May 19 that the Bangko Sentral ng Pilipinas’ (BSP) overnight reverse repurchase (RRP) facility which is its key interest rate, is adjusted higher to fight off price pressures. The rate hikes also ensure inflation expectations are well-anchored to the BSP’s two percent to four percent inflation target over the medium term or until 2024, despite second-round effects such as wage and transport fare increases as a result of elevated oil and non-oil prices.

BSP building and logo/Reuters

BSP Governor Felipe M. Medalla said Thursday that they have increased their inflation forecast for the full-year 2022 to 5.4 percent from the June 23 forecast of five percent. However, as signalled earlier, the BSP reduced the inflation forecast in 2023 to four percent from the previous 4.2 percent and also cut the 2024 forecast to 3.2 percent from 3.3 percent.

“(The) inflation target remains at risk over the policy horizon owing to broadening price pressures. Elevated inflation expectations likewise highlight the risk of further second-round effects,” said Medalla during the virtual press briefing after the Monetary Board policy meeting.

“Upside risks also continue to dominate the inflation outlook up to 2023 due to the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, the sharp increase in the price of sugar, as well as pending petitions for transport fare increases,” the BSP chief said. He added that the impact of a weaker-than-expected global economic recovery as well as the resurgence of local Covid-19 infections continue to be the main downside risks to the outlook.

BSP Director for the Department of Economic Research, Dennis D. Lapid, said factors that led to the adjustments in the 2022 inflation forecast include the higher-than-expected inflation for the second quarter and July, the higher Nowcast for August, approved increases in jeepney fares and the depreciation of the peso vis-à-vis the US dollar.

Lapid said these factors offset the lower assumption for global crude oil and slower economic global growh as well as the impact of BSP rate increases.

Based on the BSP’s latest survey of private economists, as of Aug. 11, the market expects inflation to average at 5.4 percent this year, but expects higher inflation than BSP’s forecast for 2023 at 4.2 percent and in 2024 at 3.7 percent.

Lapid said most analysts see upside risks coming from elevated global oil and food prices, as well as higher prices for selected goods and services due to rising input costs, second-round effects, and peso depreciation resulting from the aggressive US Federal Reserve and other central banks’ tightening.

Meantime, easing of global prices is a possible downside risk to inflation outlook, as well as continued BSP rate hikes, resurgence of Covid cases and weaker global economic activity.

On Thursday, the Monetary Board likewise raised the interest rate on the BSP’s overnight deposit and lending facilities by 50 bps to 3.25 percent and 4.25 percent, respectively. The adjusted rates will take effect on Friday, Aug. 19.

Last Wednesday, Medalla has hinted of further tightening in the next meetings of the Monetary Board. The next policy meeting is Sept. 22 followed by two more on Nov. 17 and Dec. 15.

Since May 19, the Monetary Board has raised the policy rate by 175 bps. Its initial lift off were two 25 bps rate hikes last May and on June 23, followed by an off-cycle 75 bps last July 14.