The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday raised for the fourth time this year the overnight borrowing rate by 50 basis points to 3.75 percent to tame the accelerating inflation.
The adjustment bought the total policy rate increase this year to 175 basis points, after it stayed at a record low of 2 percent in 2021.
BSP Governor and MB chairman Felipe Medalla said in a news briefing the interest rates on the overnight deposit and lending facilities were also adjusted to 3.25 percent and 4.25 percent, respectively.
“The BSP’s latest baseline forecasts have shifted higher for 2022, with average inflation projected to breach the upper end of the 2 percent to 4 percent target range at 5.4 percent,” Medalla said.
“While the forecasts for 2023 and 2024 have declined to 4.0 percent and 3.2 percent, respectively, the inflation target remains at risk over the policy horizon, owing to broadening price pressures. Elevated inflation expectations likewise highlight the risk of further second-round effects,” he said.
Oxford Economics, a UK-based think tank, said that despite the weaker-than-expected growth in the second quarter, the BSP continued to prioritize tackling inflation, which quickened to 6.4 percent in July, and supporting the peso, which remained depressed amid narrow interest rate differential with the US.
“We continue to expect another 25 bp hike in Q4. Inflation is yet to reach its peak of around 7.7 percent in Q4, and we see the peso remaining weak in 2022 entering into 2023, keeping import prices elevated. As such, the BSP still has more work to do. But thereafter, we expect the bank to take an extended pause,” Oxford Economics said in a statement.
Medalla said upside risks continued to dominate the inflation outlook until 2023 because of the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, the sharp increase in the price of sugar and the pending petitions for transport fare adjustments.
The impact of a weaker-than-expected global economic recovery and the resurgence of local COVID-19 infections were the main downside risks to the outlook.
Medalla said that despite some moderation in economic activity in recent months, “overall domestic demand conditions have generally held firm, supported by improved employment outturns and by ample liquidity and credit.”
He said further monetary action was deemed necessary to anchor inflation expectations and avoid a further breach in the inflation target over the policy horizon.
He said the favorable gross domestic growth in the first half at 7.8 percent gave the BSP the flexibility to act against inflation pressures, while allowing domestic demand to sustain recovery momentum amid prevailing headwinds.
The Monetary Board also continues to urge timely non-monetary government interventions to mitigate the impact of persistent supply-side pressures on commodity prices, he said.
“The BSP reassures the public of its commitment and readiness to take all necessary actions to steer inflation towards a target-consistent path over the medium term in keeping with its price and financial stability mandates,” Medalla said.
The Monetary Board in July raised the policy interest rate by a bigger 75 basis points to control inflation and support the peso, a move that surprised the domestic financial markets.
Medalla said raising further the policy rate for the rest of the year could be possible, given the continuing risks to economic growth of the higher inflation rate.
Latest data from the Philippine Statistics Authority showed that inflation in July accelerated to a 45-month high of 6.4 percent from 6.1 percent in June, driven by faster increases in the prices of food, non-alcoholic beverages and higher transport fares.
This brought the average inflation in the first seven months to 4.7 percent, above the 2022 target range of 2 percent to 4 percent.
