Rolling back its pandemic-induced interventions, the policymaking Monetary Board yesterday decided to raise the interest rate on the key rates of the Bangko Sentral ng Pilipinas (BSP) by 25 basis points (bps).
Effective today, BSP’s overnight reverse repurchase facility will be at 2.25 percent. The interest rates on the overnight deposit and lending facilities will be at 1.75 percent and 2.75 percent, respectively.
Benjamin Diokno, BSP governor and Monetary Board chief, noted the latest baseline forecasts have “further shifted higher since the previous monetary policy meeting in March.”
“(This indicates that) elevated inflation pressures could persist over the policy horizon,” Diokno said.
He stressed that average inflation is likely to breach the upper end of the 2 to 4 percent target range in 2022 at 4.6 percent, while the forecast for 2023 has edged closer to the upper end of the target band at 3.9 percent.
“The balance of risks to the inflation outlook now leans toward the upside for both 2022 and 2023, with upside pressures emanating from the potential impact of higher oil prices, including on transport fares, as well as the continued shortage in domestic pork and fish supply,” Diokno noted.
Downside risks, meanwhile, are linked mainly to the potential impact of a weaker-than-expected global economic recovery amid the lingering threat of COVID-19 infections, heightened geopolitical tensions, and a tightening of global financial conditions.
Diokno added they have observed the emergence of second-round effects, including the higher-than-expected adjustment in minimum wages in some regions.
“Inflation expectations have likewise risen, highlighting the risk posed by sustained pressures on future wage and price outcomes,” Diokno said.
The BSP chief added the strong rebound in domestic economic activity and labor market conditions during the first quarter of this year “provide scope for the BSP to begin its exit strategy from monetary accommodation.”
“With the provisional advances to the national government reduced from P540 billion in 2020 and 2021 to only P300 billion in January 2022, the national government will fully settle these loans today, ahead of the maturity schedule of 11 June 2022,” Diokno said.
Given ample liquidity, a gradual recovery in credit activity, and stable financial market conditions, Diokno said they have also decided to reconfigure the BSP’s government securities purchasing window “from a crisis intervention measure into a regular liquidity facility under our interest rate corridor framework.”
“As part of the BSP’s standard monetary operations toolkit for injecting liquidity into the financial market, the recalibrated GS purchasing window shall enhance the BSP’s ability to manage domestic liquidity conditions and ensure the sustainability of its balance sheet,” Diokno said.
“Given these considerations, the Monetary Board believes a timely increase in the BSP’s policy interest rate will help arrest further second-round effects and temper the buildup in inflation expectations. The Monetary Board likewise reiterates its support for the sustained implementation of non-monetary interventions to mitigate the impact of persistent supply-side factors on inflation, particularly food supply and prices,” Diokno said.
The continued volatility in global oil and non-oil prices due to the conflict in Ukraine pushed the country’s inflation to its fastest in three years, data from the Philippine Statistics Authority (PSA) showed.
Consumer prices rose by 4.9 percent in April from the previous month’s 4 percent. This is the highest inflation rate since 2019 after the consumer price index was rebased to 2018 from 2012.
Year-to-date inflation settled at 3.7 percent, within the 2-4 percent target for 2022.
“On balance, persistent inflationary pressures point to the need for prompt monetary action to anchor inflation expectations. As the economic recovery continues to gain traction, the BSP shall proceed with its plans for the continued gradual withdrawal of its extraordinary liquidity interventions and the start of the normalization of its monetary policy settings.
Looking ahead, the pace and timing of further monetary policy actions by the BSP shall be guided by data outcomes, in keeping with the BSP’s price and financial stability objectives,” Diokno said.
Economists at the Bank of the Philippine Islands (BPI) said despite yesterday’s hike, the real policy rate “remains negative despite the rate hike of the BSP and has been negative for 20 months.”
“Raising the policy rate in this meeting has mitigated the risks that might have worsened without any adjustments in monetary policy. The possibility of bigger rate hikes and intermeeting hikes would have increased if the BSP did not hike (on Thursday). With the Fed likely to hike by 100 basis points in the next two months, the differential of the Fed and BSP policy rates by end of July would be 50 basis points assuming the BSP will only start hiking in June. In this scenario, the peso is expected to weaken at a faster pace,” BPI said.
The bank stressed “inflation has probably not reached the peak yet despite the recent surge in consumer prices.”
“Considering these risks, we now expect at least 100 basis points hike from the BSP this year from 75 bps previously. Despite this, we believe the economy has enough cushion in case the BSP decides to hike its policy rate further. Even with a 100 bps rate hike this year, the policy rate will still be below historical and pre-pandemic levels. Furthermore, the impact of rate hikes is usually gradual and the economy has the capacity to absorb slightly higher interest rates especially now that demand is almost back to pre-pandemic level,” BPI said.
Nicholas Mapa, ING Bank Philippines senior economist, said “markets have priced in an adjustment from the central bank given recent developments.”
“Elevated energy and food prices are likely to keep headline inflation above target for time while a recent wage hike confirms that second round effects have finally sprouted up. We expect BSP to retain its hawkish stance with the central bank likely to offload up to 75 bps worth of rate hikes in 2022,” Mapa said.
Mapa added the bigger development, however, was the “quick walk back of pandemic support with BSP ending the P320 billion provisional advance on top of recalibrating the bond purchase window.”
“With the economic recovery gaining traction, BSP decided to implement its exit strategy quickly and we expect further normalization throughout the year,” Mapa said.
