In a surprise move, the Monetary Board (MB) yesterday raised the key rates of the Bangko Sentral ng Pilipinas (BSP) by 75 basis points (bps) as “signs of sustained and broadening price pressures” mostly from other countries continue.
The BSP’s overnight reverse repurchase facility now stands at 3.25 percent. The interest rates on the overnight deposit and lending facilities were also raised to 2.75 percent and 3.75 percent, respectively.
Yesterday’s action came just after a back-to-back rate hike of 25 bps each last May and June as the MB begins with its exit strategy from the loose monetary policy it delivered to help shield the economy from the effects of the strict lockdown measures imposed to combat the coronavirus pandemic.
It is also historically the largest, single tightening action of the MB. The most recent time the MB made an adjustment of this magnitude was in June 2016 when the policy was reduced by 100 bps. But it was an operational adjustment as they shifted to the current interest rate corridor framework.
The last time that the MB had an off-cycle action was in April 2020, when it decided to cut the policy rate by 50 bps to 2.75 percent in view of the pandemic.
In raising the policy interest rate anew, Felipe Medalla, BSP governor and MB chief, said they recognized that a significant further tightening of monetary policy “was warranted by signs of sustained and broadening price pressures amid the ongoing normalization of monetary policy settings” here and around the world.
“By taking urgent action, the MB aims to anchor inflation expectations further and temper mounting risks to the inflation outlook. In particular, policy action is intended to help manage spillovers from other countries that could potentially disanchor inflation expectations,” Medalla said.
The US Federal Reserve, most often used as barometer of other central banks, began tightening policy only in March, and has already raised its benchmark overnight lending rate by 1.5 percentage points.
Other central banks around the world are also in tightening mode as global inflation continues to rise at unprecedented pace, some even hitting multi-year highs.
Medalla stressed that the scheduled meeting next month will push through.
Medalla said the MB “continues to urge timely non-monetary government interventions to mitigate the impact of persistent supply-side pressures on commodity prices.”
“The BSP reassures the public of its unwavering commitment and readiness to take further necessary actions to steer inflation towards a target-consistent path over the medium term in keeping with its price stability mandate,” Medalla said.
Consumer prices continued to accelerate in June, breaching the 6-percent mark at 6.1 percent, brought about by the higher annual growth rate in the indices for food and non-alcoholic and transportation.
Average inflation for the first half of the year was at 4.4 percent.
Francisco Dakila, BSP deputy governor, said based on available data, there have been some further second round effects appearing.
“Our survey on the private sector also showed higher inflation forecasts. Partial results showed that for 2022, the mean forecast has risen to 5.4 percent from 4.9 percent. For 2023, it has risen to 4.4 percent from 3.9 percent previously. So, these are evidences of further spillovers,” Dakila said.
There are no changes to the current inflation forecasts, however.
“It would be announced on next month’s (scheduled) meeting. We would want to incorporate the latest data,” Dakila said.
By the next meeting, Dakila said they would have new information on inflation and gross domestic product (GDP) growth.
“That would help us assess if we need further action. As we have always emphasized, we remain data dependent. Therefore, the August meeting should push through,” Dakila said.
PH economy robust
Medalla said the MB noted favorable conditions arising from the strong rebound in growth thus far in the year which suggest that the “domestic economy can accommodate a further tightening of monetary policy settings.”
“We actually see the growth may be closer to the upper band of the DBCC (Development Budget Coordination Committee) forecasts. That comes on the back of the strong first quarter performance. Second quarter is very likely strong or could be stronger than the first quarter,” Dakila said.
Benjamin Diokno, Department of Finance secretary and former BSP governor, said the economy “continues to be robust to absorb the recent monetary policy rate increase given the favorable expansion of economic activity early this year.”
“The DBCC target range for the GDP growth rate (6.5 to 7.5 percent) has been set to be able to incorporate the various pace of monetary policy normalization by the BSP. The growth outlook is seen to be supported by the maintenance of loosened quarantine restrictions as well as the positive impact of structural reforms including CREATE (Corporate Recovery and Tax Incentives for Enterprises), FIST (Financial Institutions Strategic Transfer), PSA (Public Service Act), RTL (Retail Trade Liberalization) and FIA (Foreign Investment Act),” Diokno said.
“The economy was growing at that rate before the pandemic, when policy rate was at 4 percent. We estimate that the economy will be back to where it was before the pandemic by middle of this year, or by the third quarter of 2022 at the latest. The BSP simply accelerated the normalization process,” Diokno added.
Economists at the Bank of the Philippine Islands (BPI) believe the “economy has enough capacity to absorb (the rate hike).”
“GDP growth may slow down a bit because of higher interest rates, but it might be worse if inflation goes up further. It should be noted that 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, which will likely affect the economy more severely compared to higher interest rates,” BPI said.
Reanchor inflation
“After months of staying dovish, the BSP whips out a jumbo 75 bps rate hike. With inflation past target and peso at multiyear weakness, BSP attempts to reanchor inflation expectations and show resolve to combat inflation,” Nicholas Mapa, ING Bank senior economist, said.
BPI, however, said the latest move from the BSP “is in line with our expectations.”
“Back in March, we started to discuss the increasing possibility of an off-cycle rate hike given the volatility of oil and the currency. We said that kicking the can further may eventually lead to a situation that could force the BSP to hike by more than 25 bps in one meeting, similar to what happened in 2018,” BPI said.
