The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas (BSP), raised the overnight borrowing rate by 25 basis points to 6.5 percent in an off-cycle move to rein in inflation, Governor Eli Remolona Jr. said Thursday.
The tightening might not end there this year, as Remolona said in a briefing the BSP would weigh the gross domestic product growth in the third quarter and the inflation rate in October for a possible further policy action.
“Inflation and the Q3 GDP will come out [before the next meeting on Nov. 16]. So these are additional data to consider…. We are hoping that the data will be nicer to us. But if not, we will consider a further rate hike [in the November meeting],” said Remolona, who is also the chairman of the Monetary Board.
Remolona said he was no longer expecting inflation to return to the target range of 2 percent to 4 percent this year.
“I think from March to July next year, inflation will be above 4 percent…That is what our model says. Beyond July [2024] it will be somewhere around 3 percent and stay there for the rest of 2024,” he said.
Remolona said despite the aggressive policy stance, the monetary tightening had not affected the economy’s growth prospects, as the slowdown in the past months was due to the waning of pent-up demand.
He said GDP growth in the third quarter might settle around 4.5 percent which, could represent “some recovery from the second quarter [of 4.3 percent].”
The BSP also adjusted the interest rates on the overnight deposit and lending facilities to 6.0 percent and 7.0 percent, respectively.
The Monetary Board said it recognized the need for urgent monetary action to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations.
The latest baseline projections point to an elevated inflation path over the policy horizon as upside risks continue to manifest.
Inflation forecast for 2024 was raised to 4.7 percent from 4.3 percent, above the government’s target range.
Second-round effects also broadened, including transportation fare increases and minimum wage adjustments. Inflation expectations rose sharply, highlighting the risk of further second-round effects.
“The balance of risks to the inflation outlook still leans significantly toward the upside, due mainly to the potential impact of higher transport charges, electricity rates, international oil prices, and minimum wage adjustments in areas outside the National Capital Region,” the BSP said.
Meanwhile, the effect of a weaker-than-expected global recovery and government measures to mitigate the effects of El Niño weather conditions could temper inflationary impulses.
“On the output side, recent domestic indicators point to dissipating pent-up demand in the near term. Nevertheless, the country’s medium-term growth prospects remain largely intact. The Monetary Board is closely monitoring the impact of the increase in interest rates as these work their way through the economy,” the BSP said.
The Monetary Board said it continues to support fiscal efforts to sustain growth through more rapid programmed spending, as well as non-monetary interventions to address persistent supply-side pressures on prices.
It supports the economic managers’ timely efforts to extend the effectivity of EO 10 beyond 2023 as well as to reform the Tariff and Customs Code.
Looking ahead, the Monetary Board said it is necessary to keep monetary policy settings tighter for longer until inflationary expectations are better anchored and a sustained downward trend in inflation becomes evident.
“In this regard, the Monetary Board will continue to be guided by incoming data. The BSP is prepared for follow-through monetary policy action as necessary to bring inflation back to a target-consistent path, in keeping with its price stability mandate,” the board said.