In another unprecedented move, the Monetary Board yesterday announced it will raise the key rates of the Bangko Sentral ng Pilipinas (BSP) by a giant 75 basis points (bps), right after the US Federal Reserve hiked by as much its monetary policy settings.
But Felipe Medalla, Monetary Board chief and BSP governor, said the action is not “off-cycle” as the rate hike will take effect on November 17, the next scheduled meeting of the Monetary Board.
“The BSP deems it necessary to maintain the interest rate differential prevailing before the most recent Fed rate hike, in line with its price stability mandate and the need to temper any impact on the country’s exchange rate of the most recent Fed rate hike,” Medalla said.
He said by matching the Fed’s rate hike, “the BSP reiterates its strong commitment to its mandate of maintaining price stability by aggressively dealing with inflationary pressures stemming from local and global factors.”
“The BSP remains vigilant in monitoring all risks to the inflation outlook and is prepared to take necessary policy actions to bring inflation toward a target-consistent path, wherein the average year-on-year headline inflation will be within the target band of 2 to 4 percent in the second half of 2023 and in the full year of 2024,” Medalla said.
The move will bring the BSP’s overnight reverse repurchase facility from the current 4.25 percent to 5 percent. The interest rates on the overnight deposit and lending facilities will also be raised by 75 bps.
This will be 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.
The announcement also came after the BSP released on Monday its month-ahead inflation forecast.
The BSP projects October 2022 inflation to settle within the range of 7.1 to 7.9 percent, much faster than September’s four-year high of 6.9 percent.
BSP said inflation pressures in October “emanated from transport fare hikes, elevated domestic petroleum prices, higher agricultural commodity prices due to recent typhoons, and the depreciation of the peso.”
Reacting to yesterday’s announcement, Michael Ricafort,
RCBC chief economist, said the move was “unprecedented in a positive manner.”
“The clear and specific signals from local authorities have been unprecedented in a positive manner, in terms of greater transparency and forward-looking in nature, thereby promoting greater stability for the local economy and financial markets, as well as creating an environment more conducive for better planning and preparations for businesses/industries, consumers, other institutions, and the general public,” Ricafort said.
He said the announcement will help “stabilize the peso exchange rate, actual inflation, and inflation expectations, on top of other measures in the policy tool kit.”
Ricafort sees the key local policy rate by end-2022 at between 5.5 and 6 percent, “as a function of further Fed rate hikes and the trend in the US inflation as one of the most important data being monitored, as well as the behavior of the peso exchange rate vis-a-vis other currencies.”
Domini Velasquez, China Bank chief economist, said they were expecting the Monetary Board to follow the Fed’s movement with a 75 bps hike for November.
“The statement of Medalla before markets opened, giving certainty on the size of the rate hike on November 17, likely tried to preempt the foreign exchange market from reacting, i.e., peso depreciating before the monetary board meeting,” Velasquez said.
“Crucial in (US Fed chief Jerome) Powell’s statement is that they see the terminal rate of the US higher than their September meeting. BSP will need to increase policy rates until next year if they will maintain the 100 bps interest rate differential,” she added.
