In an off-cycle move, the Monetary Board yesterday decided to raise the key rate of the Bangko Sentral ng Pilipinas by 25 basis points to 6.50 percent effective today.
Accordingly, the interest rates on the overnight deposit and lending facilities will be set to 6.0 percent and 7.0 percent, respectively.
Rates are now at their highest in more than 16 years.
Eli Remolona, BSP governor and Monetary Board chief, said the Board “recognized the need for this urgent monetary action to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations.”
“The Monetary Board deems it necessary to keep monetary policy settings tighter for longer until inflationary expectations are better anchored and a sustained downward trend in inflation becomes evident,” Remolona said.
The Board has been keeping the rates steady for the past 4 meetings at 6.25 percent. The next monetary policy setting meeting will push-through, as scheduled, on November 16.
Remolona stressed that the Board is prepared for a follow-through action “as necessary to bring inflation back to a target-consistent path, in keeping with its price stability mandate.”
Data from the Board showed latest baseline projections point to an “elevated inflation path over the policy horizon as upside risks continue to manifest.”
“Before today’s monetary policy action, the staff risk-adjusted forecast for 2024 was 4.7 percent, from 4.3 percent previously. This is well above the government’s target range. At the same time, second-round effects have broadened, including transportation fare increases and minimum wage adjustments. Inflation expectations have risen sharply, highlighting the risk of further second-round effects,” Remolona said in a statement.
He explained that the balance of risks to the inflation outlook “still leans significantly toward the upside, due mainly to the potential impact of higher transport charges, electricity rates, international oil prices, and minimum wage adjustments in areas outside the National Capital Region.”
“The Monetary Board is closely monitoring the impact of the increase in interest rates as these work their way through the economy. The Monetary Board also continues to support fiscal efforts to sustain growth through more rapid programmed spending, as well as non-monetary interventions to address persistent supply-side pressures on prices,” Remolona said.
Nicholas Mapa, ING senior economist, said “rate hikes will work to slow growth further, resulting in less demand side pressure and eventually slower demand pull inflation.”
“We expect further tightening from BSP in the near term as Remolona has indicated 6.75 percent as his potential terminal rate. Against this backdrop, we believe inflation could still remain elevated in 2024 unless supply side remedies are deployed while growth will likely grind slower to 4.7 percent in 2023 and 4.5 percent in 2024,” Mapa said.
Michael Ricafort, RCBC chief economist, said the surprise local policy rate hike “could be something preemptive in nature to better manage both actual inflation as well as inflation expectations, in terms of the need to better anchor inflation back to the central bank’s target of 2 percent-4 percent range.”
Ricafort said local inflation could still reach the BSP’s target of 2 percent to 4 percent by the first quarter of next year, instead of the earlier forecast of by the fourth quarter this year.
“If local inflation reaches the BSP’s target, this could support a possible cut in local policy rates in 2024 as signaled by some local authorities and could also support a possible cut in banks’ reserve requirements or at least the continued hawkish pause stance as signalled and reiterated recently,” he added.
Local policy rates, he said, would still be “largely a function of future Fed rate moves (pause or hike) as well, fundamentally, the local inflation trend, and the behavior of the peso exchange rate, which affects import prices and overall inflation.”
