As expected, the central bank’s Monetary Board raised its benchmark rate by another 25 basis points (bps) to 6.25 percent on Thursday, March 23, to ensure inflation will fall below four percent by November or December this year. Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla in a media briefing, said they could not as yet tell if they will pause or hike rates again when next they meet, which is on May 18, because there could be external shocks such as new geopolitical tensions or higher global fuel prices in the next eight weeks that will influence their actions. “In the absence of new shocks we think we are already moving in the right direction,” he told reporters Thursday. The “right direction” means a below-four percent inflation by end-2023. Medalla and BSP Deputy Governor Francisco G. Dakila Jr. said for 2023, the BSP now expects average inflation of six percent versus its Feb. 16 projection of 6.1 percent. For 2024, the BSP also cut its inflation estimate to 2.9 percent from the previous 3.1 percent. Dakila said one of the main reasons for the downward adjustment in the forecast is the slightly lower February inflation of 8.6 percent from January’s 8.7 percent. Another factor is the “more challenging growth outlook” and the cumulative impact of interest rate increases in the last nine straight rate policy meetings. The two officials said a 25 bps rate increase will only cut GDP growth by two bps. In deciding its latest policy setting, the BSP worked on the assumption that GDP will grow by 6.5 percent this year. Based on its nowcast, they expect a 7.1 percent growth for the first quarter. Medalla said high inflation is not a “downer” when it comes to the economy. He said demand continued to be on the strong side in some sectors. However, expanding the economy “will be more difficult in 2024” when pent-up demand are weaker, he said. Meanwhile, the BSP chief said a 6.25 percent overnight borrowing or reverse repurchase (RRP) rate is not going to be problematic for Philippine banks, and that unlike in the US where liquidity issues of some of its banks resulted in financial failures mainly on account of higher Federal Reserve rates, such cases will not happen here. Medalla reiterated his point earlier that local banks are differently set up than US banks, and that most of its holdings are in fixed-income government securities and these are not much in the first place. Instead, local banks’ loans in terms of share in total assets is higher at 70 percent. He explained that in the US case, the US Fed is coming from a very low point. “(We) never came from a low interest rate and therefore bond prices did not rise too much,” he said. The Philippines also do not have 30-year bonds and are mostly shorter duration. “Clearly the impact of the same (400 bps) increase is different. (Also) our banks are actually better regulated. Our banks are also I think very well-governed and they did not take that kind of very large, unhedged risks. Therefore, what happened in the US where policy rate increases (affected its) banks (this will not happen) here.” The last time the BSP increased the RRP rate by 25 bps was on May 19, 2022, and then again on June 23. This was followed by two 75 bps rate hikes and four 50 bps in response to the US Fed’s similar move and to narrow the gap between US rates and BSP rates, and the exchange rate differential. At 6.25 percent, the BSP has tightened its monetary policy setting by a cumulative 425 bps since May last year. The last time the RRP rate was in the six percent level was in November 2008. The new RRP rate will take effect on Friday, March 24. The BSP also raised the interest rates on the overnight deposit and lending facilities at 5.75 percent and 6.75 percent, respectively. Medalla said the latest inflation forecasts reflect the cumulative impact of the BSP's policy rate adjustments and the slower growth outlook on both the domestic and external fronts. He noted that inflation expectations have increased slightly for 2023, while those for 2024 and 2025 remain near the upper end of the target band. Meantime, Medalla said the Monetary Board supports the creation of the Inter-agency Committee on Inflation and Market Outlook. He said for now, the balance of risks to the inflation outlook for 2023 and 2024 continue to tilt heavily towards the upside. “The effect of supply shortages on domestic food prices remains a concern, while the potential impact of higher transport fares, increasing electricity rates, as well as above-average wage adjustments in 2023 point to the broader-based nature of price pressures. On the downside, the impact of a weaker-than-expected global economic recovery continues to be the primary factor that could dampen inflation,” said Medalla. In addition, Medalla said the new rate hike would “help ease persistent price pressures from here and abroad as well as further realign inflation expectations with the target band over the policy horizon.” “Further policy tightening will also preserve the buffer against external spillovers amid heightened uncertainty and volatility emanating from financial sector distress in advanced economies. Nevertheless, even as the BSP has assessed that the Philippine banking system is resilient to evolving market conditions, the BSP continues to keep a watchful eye over developments in the international banking industry,” said the BSP chief.