The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, raised on Thursday the benchmark policy interest rate by another 50 basis points to 4.25 percent to rein in inflation and prevent the further depreciation of the peso, which slid to a new record low.
It came following an earlier 75-basis-point hike by the US Federal Reserve to tame the persistently high inflation in the world’s largest economy.
The latest adjustment brought the BSP’s total rate increase this year to 225 basis points, from the record low of 2 percent at the start of the year. The BSP maintained the 2 percent interest rate in 2021 to support the economy’s recovery from the pandemic.
Bank of the Philippine Islands said given the uncertainties both here and abroad, the BSP might hike the policy rate again in the last two meetings of the year “up to 5.25 percent depending on what the Fed will do and the behavior of the exchange rate.”
BPI said in a report that assuming the Fed officials would stick to their latest dot plot, the Fed Funds rate might increase further to 4.4 percent in 2022 and 4.6 percent in 2023 from .
“If the BSP continues to hike by 50 bps only in the last two meetings of the year, the differential with the US rate will go back to where it was in July when the BSP did an off-cycle hike. In this scenario, the peso may continue to depreciate and may even breach the 59 level. This may lead to another inter-meeting hike given the need to temper the depreciation of the peso,” BPI said.
London-based Oxford Economics said the BSP might raise interest rates by a further 25 basis points in November, before taking an extended pause.
BSP Deputy Governor Francisco Dakila Jr. said in an online briefing the latest rate hike would take effect on Sept. 23. The interest rates on the overnight deposit and lending facilities were also raised by 50 bps to 3.75 percent and 4.75 percent, respectively.
Dakila said the BSP’s latest baseline forecasts showed that average inflation was still projected to breach the upper end of the 2 percent to 4 percent target range at 5.6 percent in 2022.
The BSP raised the inflation forecast for 2023 to 4.1 percent, and adjusted the 2024 estimate to 3.0 percent.
“In deciding to raise the policy rate anew, the Monetary Board noted that price pressures continue to broaden. The rise in core inflation indicates emerging demand-side pressures on inflation,” Dakila said.
“Moreover, second-round effects continue to manifest, with inflation expectations remaining elevated in September following the approved minimum wage and transport fare increases. Nonetheless, inflation expectations continue to be broadly anchored over the medium term,” he said.
Dakila said the risks to the inflation outlook remained tilted toward the upside until 2023 and broadly balanced in 2024. Price pressures may continue to emanate from the potential impact of higher global non-oil prices, pending petitions for further transport fare hikes, the impact of weather disturbances on prices of food items and the sharp increase in the price of sugar, he said.
He said the impact of a weaker-than-expected global economic recovery would be a downside risk to the outlook.
“Given elevated uncertainty and the predominance of upside risks to the inflation environment, the Monetary Board recognized the need for follow-through action to anchor inflation expectations and prevent price pressures from becoming further entrenched,” he said.
Dakila said the domestic economy could accommodate a reasonable tightening of the monetary policy stance, as demand generally held firm owing to improved employment outturns and ample liquidity and credit.
The Monetary Board urged the government to implement timely non-monetary interventions to mitigate the impact of persistent supply-side pressures on food and other commodity prices.
“The BSP reiterates its commitment to take all necessary actions to steer inflation towards a target-consistent path over the medium term, consistent with its primary mandate to promote price and financial stability,” Dakila said.
Dakila said the movement of the peso was expected as the US dollar gained strength “given the US Fed tightening… Other currencies in the region are also weakening… ”
