As prices of major consumer items remain elevated, the Monetary Board decided to raise the overnight reverse repurchase facility of the Bangko Sentral ng Pilipinas (BSP) again by another half-percentage point to 4.25 percent.
Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 3.75 percent and 4.75 percent, respectively.
This is the fifth consecutive tightening action by the Monetary Board this year. The key rates have been raised by a total of 225 basis points to combat broadening price pressures.
Francisco Dakila, BSP deputy governor, said that in deciding to raise the policy rate anew, the Monetary Board noted that price pressures continue to broaden.
“The rise in core inflation indicates emerging demand-side pressures on inflation. Moreover, second-round effects continue to manifest, with inflation expectations remaining elevated in September following the approved minimum wage and transport fare increases.
Nonetheless, inflation expectations continue to be broadly anchored over the medium term,” Dakila said.
Yesterday’s action by the Board came after the Federal Reserve raised US rates again by 75 basis points on Wednesday to beat down the country’s inflation and indicated that they could go even higher than investors have expected.
The Board stressed the risks to the Philippine inflation outlook “remain tilted toward the upside until 2023 and broadly balanced in 2024.”
Full-year inflation average is now pegged at 5.6 percent, breaching the government’s full-year target range of between 2 and 4 percent by more than one-and-a-half percentage point.
For 2023, inflation is seen to still breach the target, albeit slightly, at 4.1 percent before slowing down to 3 percent the following year.
“Price pressures may continue to emanate 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,” Dakila said.
After five consecutive months of uptrend, the country’s inflation slightly eased in August to 6.3 percent due mainly to lower annual increases in transportation, food and non-alcoholic beverages.
The actual average inflation from January to August now stands at 4.9 percent, way above the full-year average target.
But core inflation, which excludes volatile food and energy items, shoot up to 4.6 percent from 3.9 percent in July.
Dakila said they have yet to release their inflation forecast for September but economists see this possibly higher than August’s figures.
“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.” Dakila said.
Dakila also stressed “the impact of a weaker-than-expected global economic recovery continues to be the main downside risk to the outlook.”
“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.At the same time, the Monetary Board also continues to urge the National Government to implement timely non-monetary interventions to mitigate the impact of persistent supply-side pressures on food and other commodity prices,” Dakila added.
Economists at the Bank of the Philippine Islands (BPI) said despite the recent slowdown in inflation, they still “continue to see upside risks that could push inflation higher in the coming months.”
“In a conservative scenario, inflation may reach a peak of 7 percent in October and stay above 6.5 percent until the end of the year. Data shows we only need to see a 0.3 percent CPI uptick to hit 6.7 percent inflation in September, half of the YTD average rise of 0.6 percent. This will bring the average inflation for the year to 5.5 percent,”BPI said in a statement.
The bank said supply constraints in the agriculture sector due to structural problems and bad weather will likely continue to drive the increase in food prices.
“Even with increased importation, a decline in prices is not guaranteed since the price of global food commodities is also rising at a very fast rate. There is also an issue on how fast the country can import given the disagreements and objections related to importation,”it said.
“Considering the uncertainties both here and abroad, we expect the BSP to hike again in the last two meetings of the year, up to 5.25 percent depending on what the Fed will do and the behavior of the exchange rate,” the bank added.
