The Monetary Board of the Bangko Sentral ng Pilipinas (BSP) has again raised the key borrowing rate by 50 basis points (bps) on Thursday, Sept. 22, to 4.25 percent to ease pressures off the peso as well as ensure inflation will fall back to within the target by the second half of 2023 despite broadening price pressures.
So far, the BSP has delivered five rate hikes in a row since May 19, including an off-cycle 75 bps adjustment last July 14. In total, the reverse repurchase (RRP) rate has been increased by 225 bps to fight off price pressures and its secondary effects.
BSP Deputy Governor Francisco G. Dakila Jr., currently the governor-in-charge, announced Thursday the revisions to the inflation forecasts for 2022 until 2024.
For this year, the average inflation forecast is higher at 5.6 percent from its previous estimate of 5.4 percent, while for 2023, the forecast is now 4.1 percent from the previous four percent. However for 2024, inflation is expected to average at three percent, lower from its earlier projection of 3.2 percent.
Dakila said the Monetary Board decided on another 50 bps rate increase because of emerging demand-side pressures on inflation and second-round effects. They also see higher inflation in September compared to 6.3 percent in August due to recent wage and fare hikes.
“Inflation expectations (remain) elevated in September following the approved minimum wage and transport fare increases. Nonetheless, inflation expectations continue to be broadly anchored over the medium term,” said Dakila.
Upside pressures to inflation still come from the potential impact of higher global non-oil prices, pending petitions for further transport fare hikes, the impact of weather disturbances on prices of food items, as well as the sharp increase in the price of sugar, he added. As for downside pressures, it is mainly from the weaker-than-expected global economic recovery.
“Given elevated uncertainty and the predominance of upside risks to the inflation environment, the Monetary Board recognized the need for follow-through action to anchor inflation expectations and prevent price pressures from becoming further entrenched,” said Dakila. He also reiterated that the domestic economy can accommodate “a reasonable tightening of the monetary policy stance, as demand has generally held firm owing to improved employment outturns and ample liquidity and credit.”
Effective Sept. 23, the interest rate on the BSP’s overnight deposit and lending facilities are 3.75 percent and 4.75 percent, respectively.
Dakila said that the 50 bps increase, which was lower compared to the most recent US Federal Reserve rate hike of 75 bps, is considered enough to ease pressures on the exchange rate. The peso has broken past P58 on Wednesday, Sept. 21.
“The intention is not to target a particular level for the exchange rate. That is not the policy objective. In deciding on the appropriate stance of monetary policy, the priority is to bring inflation back to within the target band over the medium term. This rate hike will help us achieve our price stability objective,” he said during the press briefing after the Monetary Board policy rate decision.
Dakila said the rate adjustment will help alleviate some pressures off the peso “which could in turn temper inflationary impulses stemming from elevated global commodity prices.”
He repeated that the BSP “stands ready to participate in the foreign exchange market only to ensure orderly market conditions and to reduce excessive short term volatility in the exchange rate.”
“The BSP is also prepared to utilize other tools to respond to fluctuations in the exchange rate to ensure that legitimate demand for foreign currency is satisfied,” Dakila added.
The BSP has two more policy meetings for 2022. The next one is on Nov. 17 and the terminal rate will be decided on Dec. 15.