The Bangko Sentral ng Pilipinas’ (BSP) benchmark rate is now higher at five percent after the Monetary Board on Thursday, Nov. 17, did as it has signalled two weeks ago to raise the overnight borrowing rate by 75 basis points (bps).
In a press briefing, BSP Governor Felipe M. Medalla said this will probably be the last time that the BSP will do a big rate increase which was mainly in response to the US Federal Reserve’s similar move earlier this month.
This was the second 75 bps rate adjustment, the first was an off-cyle move on July 14. In total, the BSP has raised the key rate by 300 bps this year to ensure inflation expectations are properly anchored and to curb exchange rate pressures.
The last time the BSP reverse repurchase rate (RRP) was at five percent was on Jan. 29, 2009, before the interest rate corridor (IRC) system was implemented in 2016. The IRC adjusted the monetary policy transmission to ensure a “reasonably close range” with market rates, and to have a more effective policy signal since market rates track the BSP target rate.
“Everything is data dependent. It’s not normal that we have off-cycle policy rate increases. It is also not normal that a central bank governor announces what the rate will be in the meeting that will come two weeks later. Those are all rather abnormal or unusual,” Medalla told reporters and analysts on Thursday after the Monetary Board policy meeting.
“The things that caused them (rate increases) are also unusual, and I think they will not be repeated. For instance, they are now talking of the Fed making smaller increases. Also to the extent that policy rates are also rising in Europe, and other countries, then the US dollar will not be as strong (and) will not appreciate as much as it used to do,” he added.
Given all that, Medala said he “cannot say before hand that we will repeat the last increase” or mirror what the US Fed will do. The next BSP monetary policy meeting is on Dec. 15, which will decide the terminal key rate for 2022.
The BSP chief said the last two rate increases on Sept. 22 and Nov. 17 were essentially responses to what the US Fed did.
The US interest rates have been raised by four 75 bps in a row, the highest rate hikes done in a long time. The BSP rates, meantime, were raised by two 25 bps initially which was a slow start; one off-cyle 75 bps that surprised the market; two 50 bps; and finally, a second 75 bps on Thursday.
“I think that’s over. Therefore we will slowly go back to a more normal global interest rate environment,” said Medalla, referring to the US rate hikes.
“We will probably do less than the two recent not run-of-the-mill action that the BSP did, mainly the off-cycle and the 75 that was announced two weeks ahead,” he said as forward guidance.
Since price stability is a key BSP mandate, the policy rate increase is intended to bring back the inflation path to within the two percent to four percent target range by 2024.
The BSP also announced the latest revisions to the inflation forecasts. For this year, they see average inflation at 5.8 percent, higher than its Sept. 22 forecast of 5.4 percent. In 2023, they project 4.3 percent, up from the previous estimate of four percent and for 2024, at 3.1 percent which was lower from the last forecast of 3.2 percent. As of end-October, the average inflation rate stood at 5.7 percent.
The BSP expects inflation will stay above-the-target or higher than two percent to four percent in the near term amid broadening price pressures and second-round effects but will be closer to three percent than four percent by the second half of 2023.
The new five percent BSP rate will take effect on Nov. 18. The interest rates on the overnight deposit and lending facilities are also adjusted to 4.5 percent and 5.5 percent, respectively.
Medalla said the sharp increase in the inflation for the month of October indicates stronger pass-through of elevated food and energy prices as well as demand-side impulses on inflation.
The BSP maintains that upside risks are still due to elevated global food prices because of higher fertilizer costs, trade restrictions, and adverse weather conditions. Bad weather conditions in the last two months also affected prices of fruits and vegetables and disrupted the supply of key food commodities such as sugar and meat. The pending petitions for transport fare hikes also add to inflationary pressures.
With the increased second-round effects, Medalla said the Monetary Board has to be aggressive to safeguard price stability. “With the strong growth of the economy in the third quarter of 2022, domestic demand is seen to hold firm owing to improved employment outturns, investment activity, and consumer spending. On the other hand, a sizeable adjustment in the policy interest rate will help insulate the economy from external headwinds and exchange rate fluctuations that could further entrench price pressures and potentially dislodge inflation expectations,” he said.