The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday raised the overnight borrowing rate by 25 basis points to 2.25 percent to rein in inflation amid the continued economic recovery from the impact of the COVID-19 pandemic.
The policy rate adjustment was the first time in 18 months since the MB cut it by 25 basis points to a record low of 2 percent in November 2020.
BSP Governor Benjamin Diokno said in an online briefing the Monetary Board’s decision to raise the policy rate will take effect Friday. The interest rates on the overnight deposit and lending facilities were also raised to 1.75 percent and 2.75 percent, respectively.
“The Monetary Board believes that a timely increase in the BSP’s policy interest rate will help arrest further second-round effects and temper the buildup in inflation expectations. The Monetary Board likewise reiterates its support for the sustained implementation of non-monetary interventions to mitigate the impact of persistent supply-side factors on inflation, particularly food supply and prices,” Diokno said.
He said the policy rate hike incorporated the latest wage increase and the US Fed’s plan to increase interest rates further, although he said that future policy decisions would continue to be data driven.
Diokno said the strong rebound in domestic economic activity and labor market conditions in the first quarter of 2022 provided scope for the BSP to continue rolling back its pandemic-induced interventions, consistent with its exit strategy from monetary accommodation.
The economy expanded by 8.3 percent in the first quarter, a sharp reversal of the 3.8-percent contraction a year ago, as the economy continued to reopen amid the massive vaccination program to contain the spread of the pandemic, which, in turn, boosted consumer and business confidence.
He said with the provisional advances to the national government reduced from P540 billion in 2020 and 2021 to P300 billion in January 2022, the national government would fully settle these loans on May 20, ahead of the maturity schedule of June 11, 2022.
“Moreover, given ample liquidity, a gradual recovery in credit activity, and stable financial market conditions, the Monetary Board has decided to reconfigure the BSP’s government securities purchasing window from a crisis intervention measure into a regular liquidity facility under our interest rate corridor framework,” he said.
“As part of the BSP’s standard monetary operations toolkit for injecting liquidity into the financial market, the recalibrated government securities purchasing window shall enhance the BSP’s ability to manage domestic liquidity conditions and ensure the sustainability of its balance sheet,” Diokno said.
He said that in deciding to raise the policy interest rate, the Monetary Board noted that the latest baseline forecasts further shifted higher since the previous monetary policy meeting in March, indicating that elevated inflation pressures could persist over the policy horizon.
Diokno said average inflation would likely breach the upper end of the 2 percent to 4 percent target range in 2022 at 4.6 percent, while the forecast for 2023 would edge closer to the upper end of the target band at 3.9 percent.
“Given recent developments, such as the higher inflation in March and April, and continued volatility in oil prices, inflation could likely exceed 5 percent in the next few months but revert to within the target band in 2023,” Diokno said.
Diokno said the balance of risks to the inflation outlook now was leaning toward the upside for both 2022 and 2023, with upside pressures emanating from the potential impact of higher oil prices, including on transport fares, as well as the continued shortage in domestic pork and fish supply.