The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, raised the overnight borrowing rate on Thursday by 50 basis points to a more than 14-year high of 5.5 percent to prevent the second-round effects of inflation that may accelerate further this month.
BSP Governor Felipe Medalla, who is also the board chairman, said in an online briefing the rate hike would take effect Friday.
BSP Deputy Governor Francisco Dakila Jr. said the last time the policy rate hit 5.5 percent was in December 2008 during the global financial crisis. In November 2008, the policy rate reached 6 percent.
The MB also raised the interest rates on the overnight deposit and lending facilities to 5.0 percent and 6.0 percent, respectively.
“The BSP’s latest baseline forecasts show that average inflation is still projected to breach the upper end of the 2-percent to 4-percent target range for 2022 and 2023 at 5.8 percent and 4.5 percent, respectively,” Medalla said.
He said the inflation forecast for 2024 was adjusted to 2.8 percent owing to the further easing in oil prices, peso appreciation and the slightly lower domestic growth outlook, resulting in part from the BSP’s cumulative policy rate adjustments.
“The Monetary Board arrived at its decision after noting the further uptick in headline and the sharp rise in core inflation in November amid pent-up demand. Moreover, upside risks continue to dominate the inflation outlook up to 2023 while remaining broadly balanced in 2024,” Medalla said.
He said the expected upside risks to inflation over the policy horizon stemmed mainly from elevated international food prices due to high fertilizer prices and supply chain constraints.
He said that on the domestic front, trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare hikes and potential wage adjustments in 2023 could push inflation upwards. Meanwhile, the impact of a weaker-than-expected global economic recovery was the primary downside risk to the outlook.
“Amid broad-based inflation pressures, persistent upside risks to inflation and elevated inflation expectations, the Monetary Board deems it necessary to take aggressive monetary action to bring headline inflation back to within target as soon as possible. At the same time, an adjustment in the policy interest rate will continue to provide a cushion against external spillovers amid tighter global financial conditions,” Medalla said.
He said the BSP remained firm in its commitment to the primary mandate of sustaining price and financial stability and was ready to take all necessary actions to bring inflation to the government target band over the medium term.
Dakila said based on BSP simulations, every 50-basis point hike in policy rate would result in around 0.07 percent decline in gross domestic product.
Medalla, when asked if inflation already peaked in November at 8 percent, said there was still a possibility that it might accelerate by this month, taking into account the impact of recent typhoons particularly to the agriculture sector.
“We remain prepared to adjust our stance as necessary, but it would remain data dependent, guided by the latest information available,” Medalla said.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said if US inflation significantly eased further towards the 2 percent target in 2023, “there is a chance for Fed rate cuts to start in the latter part of 2023 and into 2024, as also expected in the financial markets.”
“So cuts in BSP policy rates are expected to follow any Fed rate cuts, prospectively,” Ricafort said.
“It is important to note that despite the BSP rate hikes in recent months, loan growth remained resilient and continued to grow at the fastest pace in nearly four years at more than +13 percent year-on-year, largely due to the further reopening of the economy towards greater normalcy,” Ricafort said.