The Monetary Board, the policy-setting body of the Bangko Sentral ng Pilipinas, on Thursday raised the benchmark policy rate by 75 basis points to a 13-year high of 5 percent as expected to catch up with the aggressive tightening by the US Federal Reserve.
Monetary Board chairman and BSP Governor Felipe Medalla said in an online briefing the rate hike would take effect Nov. 18. Data showed that the last time policy interest rate reached 5 percent was in February 2009.
“At its meeting on monetary policy today, the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase facility by 75 basis points to 5.0 percent, effective 18 November 2022. Accordingly, the interest rates on the overnight deposit and lending facilities will be set to 4.5 percent and 5.5 percent, respectively,” Medalla said.
The Fed early this month raised its interest rate by 75 basis points to contain inflation and hinted of more adjustments in the coming months. Other central banks also followed to prevent the depreciation of their currencies against the US dollar. The peso lost more than 12 percent of its value against the greenback this year.
Medalla said the BSP’s latest baseline forecasts indicated a higher inflation path over the policy horizon, with average inflation breaching the upper end of the 2-percent to 4-percent target range in both 2022 and 2023 at 5.8 percent and 4.3 percent, respectively. The forecast for 2024 was raised to 3.1 percent.
‘In deciding to raise the policy interest rate anew, the Monetary Board noted that core inflation has risen sharply in October, indicating stronger pass- through of elevated food and energy prices as well as demand-side impulses on inflation,” Medalla said.
He said the risks to the inflation outlook leaned strongly toward the upside until 2023 while remaining broadly balanced in 2024. He said upside risks were associated with elevated international food prices owing to higher fertilizer costs, trade restrictions, and adverse weather conditions.
Medalla said that on the domestic front, the impact of weather disturbances on the prices of fruits and vegetables, supply disruptions in key food commodities such as sugar and meat, as well as pending petitions for transport fare hikes could also exert upward pressures on inflation.
Meanwhile, the impact of a weaker-than-expected global economic recovery continues to be the main downside risk to the outlook.
“Given the increased likelihood of further second-round effects, persistent inflationary pressures and the predominance of upside risks to the inflation outlook, the Monetary Board recognized the need for aggressive monetary policy action to safeguard price stability,” Medalla said.
He said with the strong growth of the economy in the third quarter, domestic demand was seen to hold firm owing to improved employment outturns, investment activity, and consumer spending.
“On the other hand, a sizeable adjustment in the policy interest rate will help insulate the economy from external headwinds and exchange rate fluctuations that could further entrench price pressures and potentially dislodge inflation expectations,” he said.
Medalla expressed confidence that inflation would not exceed 8 percent in November or December 2022. “It is hard to forecast but it may not exceed 8 percent.. by the second half of next year, inflation may be closer to 3 percent than to 4 percent…,” Medalla said.
When asked if the BSP would continue to match the US Fed’s future policy actions, Medalla said the “Fed might have smaller increases [going forward]… so the US dollar will not appreciate too much. Perhaps our policy rate hike would be smaller if the Fed increases will be smaller.”
Rizal Commercial Banking Corp. chief economist Michael Ricafort said the local policy rate hikes could continue in the coming months, as supported by generally stronger/better economic data and also as a function of future Fed rate hikes as well as the behavior of the peso exchange rate, going forward.
“Still relatively weaker peso in recent months could still increase the possibility of further local policy rate hikes amid recent signals on possibly matching future Fed rate hikes if inflation remains high…” Ricafort said.
Inflation in October accelerated to an almost 14-year high of 7.7 percent from 6.9 percent in September 2022, driven by faster increases in the prices of food and non-alcoholic beverages.
The October inflation was the fastest since it hit 7.8 percent in December 2008 during the global financial crisis.