After noting the further uptick in prices of major consumer prices in November, the Monetary Board decided yesterday to raise the interest rate on the Bangko Sentral ng Pilipinas’ overnight reverse repurchase facility by 50 basis points to 5.5 percent, effective today.
This is the highest in more than 14 years or since November 2008, when it was at 6 percent.
The interest rates on the overnight deposit and lending facilities was also set to 5 percent and 6 percent, respectively.
Felipe Medalla, BSP Governor and Monetary Board chief, said the central bank’s latest baseline forecasts show average inflation is still projected to breach the upper end of the 2-4 percent target range for 2022 and 2023 at 5.8 percent and 4.5 percent, respectively.
However, the forecast for 2024 fell to 2.8 percent “owing mainly to the further easing in oil prices, peso appreciation, and the slightly lower domestic growth outlook resulting in part from the BSP’s cumulative policy rate adjustments.”
This is the seventh consecutive tightening action by the Monetary Board this year to combat broadening price pressures. Prior to yesterday’s announcement, the key rates have been raised by a total of 300 bps.
Yesterday’s tweak on the monetary policy stance came after the US Federal Reserve also hiked its key rates by 50 basis points.
“The Monetary Board arrived at its decision after noting the further uptick in headline and the sharp rise in core inflation in November amid pent-up demand. Moreover, upside risks continue to dominate the inflation outlook up to 2023 while remaining broadly balanced in 2024,” Medalla said.
He added the expected upside risks to inflation over the policy horizon “stem mainly from elevated international food prices due to high fertilizer prices and supply chain constraints.”
On the domestic front, Medalla said trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare hikes, as well as potential wage adjustments in 2023 could push inflation upwards.
He stressed that the impact of a weaker-than-expected global economic recovery continues to be the primary downside risk to the outlook.
“Amid broad-based inflation pressures, persistent upside risks to inflation, and elevated inflation expectations, the Monetary Board deems it necessary to take aggressive monetary action to bring headline inflation back to within target as soon as possible. At the same time, an adjustment in the policy interest rate will continue to provide a cushion against external spillovers amid tighter global financial conditions,” Medalla said.
Michael Ricafort, RCBC chief economist, said further local policy rate hikes could still be possible for the coming months, as supported by generally stronger economic data and also as a function of future Fed rate hikes as well as the behavior of the peso exchange rate.
“If US inflation significantly eases further towards the 2 percent target in the coming months of 2023, there is a chance for Fed rate cuts to start in latter part 2023 and into 2024, as also expected in the financial markets. So cuts in BSP policy rates are expected to follow any Fed rate cuts, prospectively,” Ricafort said.
Ricafort stressed that despite the BSP rate hikes in recent months, “loan growth remained resilient and continued to grow to the fastest pace in nearly four years at more than 13 percent year-on-year, largely due to the further reopening of the economy towards greater normalcy, with no lockdowns so far this year, thereby improving the ability to pay loans by borrowers.”
He added that despite the local policy rate hikes in recent months, the economic reopening narrative led to improved asset quality of banks for the coming months of 2023.
“However, further hikes in local policy rates, at some point, could become a drag on loan growth and overall economic growth amid much higher borrowing costs,” Ricafort said.
He said Higher local policy rates would lead to some increase in borrowing costs that could lead to lower earnings and valuations, as well as slow down the economy as an unintended consequence in the quest to fight off inflationary pressures.
