The Monetary Board, the policy-making body of Bangko Sentral ng Pilipinas, delivered another 25-basis-point increase in key interest rates on Thursday to stem one of the stickiest inflation rates in the region.
It raised the overnight borrowing rate to 6.25 percent and adjusted the overnight deposit and lending facilities to 5.75 percent and 6.75 percent, respectively.
BSP Governor and MB chairman Felipe Medalla said the rate hike would take effect March 24.
“The Monetary Board’s decision was based on the sum of new information and its assessment of the effects of past policy actions, which warranted a continuation of monetary tightening to anchor inflation expectations,” Medalla said in a briefing.
“With core inflation rising in February despite a modest decline in headline inflation, further monetary policy action was deemed necessary to address broadening price impulses emanating from robust domestic demand and lingering supply-side constraints,” he said.
The board slightly lowered the inflation forecast for 2023 to 6 percent from 6.1 percent made in the February meeting. The forecast for 2024 was also revised downward to 2.9 percent from 3.5 percent.
BSP Deputy Governor Francisco Dakila said the lower inflation forecasts for 2023 and 2024 took into account the easing of inflation in February to 8.6 percent from the 14-year high of 8.7 percent in January. Another factor considered was the more challenging global growth outlook.
“Moreover, inflation expectations have increased slightly for 2023, while those for 2024 and 2025 remain near the upper end of the target band. The Monetary Board supports the creation of the Inter-agency Committee on Inflation and Market Outlook,” Medalla said.
He said the balance of risks to the inflation outlook for 2023 and 2024 remained tilted heavily towards the upside. The effect of supply shortages on domestic food prices remained a concern, while the potential impact of higher transport fares, increasing electricity rates and above-average wage adjustments in 2023 pointed to the broader-based nature of price pressures.
Medalla said the impact of a weaker-than-expected global economic recovery continued to be the primary factor that could dampen inflation.
“Given these considerations, the board decided that follow-through monetary action would help ease persistent price pressures from here and abroad as well as further realign inflation expectations with the target band over the policy horizon,” he said.
Medalla said the further policy tightening would also preserve the buffer against external spillovers amid heightened uncertainty and volatility emanating from financial sector distress in advanced economies.
Rizal Commercial Banking Corp. chief economist Michael Ricafort said that for the coming months, “local policy rates could still match any future Fed rate hikes after recent Fed signals and market expectations of another possible 25 basis points hike or pause on the next Fed/FOMC meeting on May 3, 2023.”
“As a result, any additional Fed rate hike of about +0.25 or pause on May 3, 2023 could be, at least, matched locally on the next local rate-setting meetings on May 18, 2023 to maintain a more comfortable interest rate differential that help stabilize the peso exchange rate and overall inflation,” Ricafort said.
Medalla also reiterated that the Philippine banking system remained strong and would not be impacted by the collapse of a couple of banks in the United States.
“Nevertheless, even as the BSP has assessed that the Philippine banking system is resilient to evolving market conditions, the BSP continues to keep a watchful eye over developments in the international banking industry,” he said.
He said the BSP remained ready to respond further to inflation risks in line with its data-dependent approach to ensuring price and financial stability.
Medalla said the policy direction of monetary authorities would always be dependent on pertinent economic data, such as inflation and domestic output. But he said there could also be developments overseas that could affect the BSP’s policy decisions.
British financial institution Hongkong and Shanghai Banking Corp. earlier said the liquid domestic financial system was giving the BSP some room to hike interest rates further in the next two policy meetings.
“Moreover, despite the global headlines regarding Silicon Valley Bank and Credit Suisse, we still expect the BSP to hike by 25bp to 6.50 percent at the following Monetary Board meeting on the 18th of May. This is because the Philippine financial system remains sound for now, despite the aggressive pace of rate hikes over the past 10 months,” HSBC said.
