The Bangko Sentral ng Pilipinas (BSP) on Thursday, Dec. 15, announced another rate hike of 50 basis points (bps), bringing the key borrowing rate to 5.5 percent, the highest since December 2008.
BSP Governor Felipe M. Medalla told reporters that this may be the last time the Monetary Board will be increasing the reverse repurchase (RRP) rate by 50 bps and that they will go back to a more “moderate” pace of rate hikes, or less aggressive monetary policy stance.
He said there is “a good chance” that the BSP is done with the big rate hikes and that the most recent 50 bps adjustment is the last “for quite some time”.
The lower crude oil price assumptions and strengthening of the peso vis-à-vis the US dollar contributed to the BSP’s confidence at the moment. The peso on Thursday closed at P55.685 from P55.745 the day before. Medalla said he is comfortable with the current exchange rate level.
Meantime, during the press briefing, both Medalla and BSP Deputy Governor Francisco G. Dakila Jr. said the inflation average forecasts for 2023 and 2024 were revised, but the BSP is maintaining its Nov. 17 forecast of 5.8 percent inflation rate for 2022.
Dakila said that for next year, the inflation projection is higher at 4.5 percent compared to the Nov. 17 forecast of 4.1 percent, but they lowered the 2024 estimate to 2.8 percent which is within the two percent to four percent government inflation target band. The previous forecast for 2024 was 3.1 percent.
Medalla said they cut the inflation forecast for 2024 because of “further easing in oil prices, peso appreciation, and the slightly lower domestic growth outlook resulting in part from the BSP’s cumulative policy rate adjustments.”
The BSP has raised the key rate by 350 bps this year. The BSP initially increased the rates gradually with two 25 bps adjustment on May 19 and June 23, followed by a surprised 75 bps off-cycle move on July 14. The fourth and fifth rate hikes were 50 bps each on Aug. 18 and Sept. 22, followed by a 75 bps increase on Nov. 17.
The latest 11-month average inflation rate was 5.6 percent. BSP officials said the inflation, which climbed to a fresh 14-year high of eight percent in November versus 7.7 percent in October, has not reached its peak yet.
“We’re seeing inflation will further go up in December but very slightly,” said Dakila.
As for the revised forecasts for 2023 and 2024, Dakila said the main reason for the adjustment was the higher-than-expected November inflation which will affect the subsequent inflation numbers in the next months.
The BSP also adjusted the interest rates on the overnight deposit and lending facilities at five percent and six percent, respectively.
Medalla said upside risks to inflation remain for 2023 and still broadly balanced in 2024.
“The expected upside risks to inflation over the policy horizon stem mainly from elevated international food prices due to high fertilizer prices and supply chain constraints,” he said.
On the local side, Medalla noted that trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare hikes, as well as potential wage adjustments in 2023 could push inflation upwards.
The downside risks continue to be the impact of a weaker global economic recovery.
“Amid broad-based inflation pressures, persistent upside risks to inflation, and elevated inflation expectations, the Monetary Board deems it necessary to take aggressive monetary action to bring headline inflation back to within target as soon as possible. At the same time, an adjustment in the policy interest rate will continue to provide a cushion against external spillovers amid tighter global financial conditions,” said Medalla.