As earlier announced, the policymaking Monetary Board yesterday hiked the key rates of the Bangko Sentral ng Pilipinas (BSP) by 75 basis points (bps), bringing it to its highest in almost 14 years, as inflation continues to rise.
Effective today, the interest rate on the BSP’s overnight reverse repurchase facility now stands at 5 percent, a half-percentage point lower than the 5.5 percent in December 2008, at the height of the financial crisis that left global banks holding trillions of dollars of worthless investments in subprime mortgages.
The interest rates on the overnight deposit and lending facilities now stand at 4.5 percent and 5.5 percent, respectively.
Felipe Medalla, BSP governor and Monetary Board chief, said latest baseline forecasts indicate a higher inflation path over the policy horizon, with average inflation breaching the upper end of the 2 to 4 percent target range in both 2022 and 2023 and possibly hitting 5.8 percent and 4.3 percent, respectively. The forecast for 2024 has also been adjusted upwardsto 3.1 percent.
Inflation climbed 7.7 percent in October, the fastest rise since December 2008, due mainly to the faster price increases of food commodities.
“The Board will continue to take all necessary action to bring inflation back within the target band over the medium term, in keeping with its primary mandate to sustain price and financial stability,” Medalla said.
In deciding to raise the policy interest rate anew, Medalla said the Monetary Board noted that core inflation has risen sharply in October, “indicating stronger pass-through of elevated food and energy prices as well as demand-side impulses on inflation.”
“The risks to the inflation outlook lean strongly toward the upside until 2023 while remaining broadly balanced in 2024,” Medalla said.
He said upside risks are associated with elevated international food prices owing to higher fertilizer costs, trade restrictions and adverse weather conditions.
On the domestic front, Medalla said the impact of weather disturbances on the prices of fruits and vegetables, supply disruptions in key food commodities such as sugar and meat, as well as pending petitions for transport fare hikes could also exert upward pressures on inflation.
“The impact of a weaker-than-expected global economic recovery, meanwhile, continues to be the main downside risk to the outlook,” Medalla said.
“Given the increased likelihood of further second-round effects, persistent inflationary pressures, and the predominance of upside risks to the inflation outlook, the Monetary Board recognized the need for aggressive monetary policy action to safeguard price stability,” Medalla added.
He explained that with the strong growth of the economy in the third quarter of 2022, domestic demand is seen to hold firm owing to improved employment outturns, investment activity and consumer spending.
“A sizeable adjustment in the policy interest rate will help insulate the economy from external headwinds and exchange rate fluctuations that could further entrench price pressures and potentially dislodge inflation expectations,” Medalla said.
“The Monetary Board is also reassured by the timely non-monetary government interventions to mitigate the impact of persistent supply-side pressures on commodity prices, including those aimed at alleviating supply shortages and strengthening farm productivity,” he added.
This is the sixth 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 225 bps.
Yesterday’s tweak on the monetary policy stance was expected as it was already announced by Medalla on November 4, after the US Federal Reserve also hiked its key rates by 75 bps.
Domini Velasquez, China Bank chief economist, said the BSP will remain aggressive as it tries to anchor rising inflation.
“It is inevitable that the BSP will keep its 100-bp interest rate differential with the Fed. An An elevated inflation outlook in 2023, set to be the 3rd year in a row, using 2012 prices for 2021, that inflation will breach the BSP’s 4 percent target, will compel the central bank to keep interest rates high throughout most of 2023.. A possible cut might only come in the fourth quarter as inflation falls within target in the latter half of the year,” Velasquez 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; also as a function of future Fed rate hikes as well as the behavior of the peso exchange rate, going forward.”
“There is a chance that year-on-year inflation could still peak at 8 percent in the fourth quarter of this year and could start to ease gradually thereafter and could even ease year-on-year significantly due to higher base effects,” Ricafort said.
“However, this could be offset by the recent storm damage by Tropical Storm Paeng for the month of November that could lead to some pickup in agricultural prices and overall inflation especially in hard-hit areas, as well as some seasonal increase in demand and prices of Christmas holiday-related products towards December, but only to go down after the holiday season by early January,” he added.
“Thus, further local policy rate hikes could still be possible for the coming months, as supported by generally strong economic data; also as a function of future Fed rate hikes as well as the behavior of the peso exchange rate, going forward,” Ricafort also said.
He said higher local policy rates would lead to some increase in financing 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.
