For the fourth consecutive time this year, the Monetary Board yesterday decided to raise the key rates of the Bangko Sentral ng Pilipinas as latest inflation forecasts have shifted higher and likely to have breached the government’s target.
BSP’s overnight reverse repurchase facility are up by 50 basis points to 3.75 percent, effective today.
The interest rates on the overnight deposit and lending facilities were raised to 3.25 percent and 4.25 percent, respectively.
The Monetary Board has raised the key rates by a total of 175 basis points to combat broadening price pressures.
Felipe Medalla, BSP Governor, said the BSP’s latest baseline forecasts have shifted higher for 2022, with average inflation projected to breach the upper end of the 2 to 4 percent target range at 5.4 percent.
“While the forecasts for 2023 and 2024 have declined to 4 percent and 3.2 percent, respectively, the inflation target remains at risk over the policy horizon owing to broadening price pressures,” Medalla said.
He said “elevated inflation expectations likewise highlight the risk of further second-round effects.”
“Headline will still increase and will probably peak on the 10th or 11th month of this year.
Naturally, inflation will still be high by the first quarter of next year and will start to go down by the second half. All of these will depend on several factors. On the local front, it will be easier if we are able to address local supply pressures.” Medalla said.
The country’s annual headline inflation continued its uptrend to 6.4 percent last month, from 6.1 percent in June, the highest since October 2018.
With July’s inflation, the Philippines’ average inflation from January stood at 4.7 percent.
According to the Philippine Statistics Authority, the main source of the upward trend of July inflation was the higher annual growth rate in the index for food and non-alcoholic beverages at 6.9 percent, from 6 percent in the previous month. Transport index followed with 18.1 percent annual growth, from 17.1 percent in June 2022.
Upside risks, according to Medalla, also continue to dominate the inflation outlook up to 2023.
“(These are) Due to the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, the sharp increase in the price of sugar, as well as pending petitions for transport fare increases,” Medalla said.
He said the “impact of a weaker-than-expected global economic recovery as well as the resurgence of local COVID-19 infections continue to be the main downside risks to the outlook.”
Medalla said despite some moderation in economic activity in recent months, overall domestic demand conditions have generally held firm, supported by improved employment outturns and by ample liquidity and credit.
“For these reasons, the Monetary Board deemed further monetary action to be necessary to anchor inflation expectations and avoid a further breach in the inflation target over the policy horizon. The favorable growth outcome in the first half of the year also gives the BSP the flexibility to act against inflation pressures while allowing domestic demand to sustain its recovery momentum amid prevailing headwinds,” Medalla said.
A contractionary policy, by raising rates, limits the outstanding money supply to slow growth and decrease inflation and reduce the level of money circulating in the economy.
“We have to be data dependent. Thus far, we think our recovery is respectable enough to absorb further hikes. It is impossible for tightening to not reduce growth. However, respectable growth is still possible. But to us, price stability is the major concern. I wish I could tell you that this one is the last or the next one,” Medalla said.
Economists at the Bank of the Philippine Islands (BPI) said yesterday’s action was in line with the markets’ expectations
“Even with this 50bps hike, we believe the economy has enough capacity to absorb this.
GDP growth may slow down a bit because of higher interest rates, but it might be worse if inflation continues to rise,” BPI said.
BPI noted household consumption accounts for 70 percent of the economy, and inflation has a more severe impact on consumption.
“The economy managed to grow by 6.3 percent and 6.1 percent in 2018 and 2019 even if the policy rate was above 4 percent. A prolonged period of high inflation will eventually hurt consumers and businesses, which will likely affect the economy more severely compared to higher interest rates,” BPI said.
BPI said although a slowdown in August consumer prices is “a possibility due to high base effects, inflation will remain a challenge until the first half of 2023.”
“We have still yet to see the peak in inflation near 7 percent in October should global price pressures from oil, energy and food remain substantial. In this scenario, average inflation is expected to settle between 5 to 5.5 percent. Given this, the BSP may hike again by at least 25 bps in its November policy meeting,” BPI said.
The Monetary Board also continues to urge timely non-monetary government interventions to mitigate the impact of persistent supply-side pressures on commodity prices.
“We cannot overemphasize the need to use non-monetary tools. The best measure now is to loosen import restrictions. This will hopefully reduce prices,” Medalla said.
“Supply disruptions have kept food prices elevated. Refined white sugar, and can remain vulnerable to higher transport costs, trade restrictions, and weather disturbances. This, along with sustained Peso depreciation due to import expansion and hawkish Fed policy will likely compel the BSP keep up with its adjustments through 2023,” BPI added.