The Monetary Board of the Bangko Sentral ng Pilipinas raised on Thursday the benchmark policy interest rate by another 50 basis points to 6 percent to rein in inflation that blew past the target range last year and accelerated to a 14-year high of 8.7 percent in January 2023.
BSP Governor and MB chairman Felipe Medalla said in a briefing the rate hike would take effect Feb. 17, 2023. The interest rates on the overnight deposit and lending facilities were also raised to 5.5 percent and 6.5 percent, respectively.
BSP data showed the last time the policy rate hit 6 percent was in August 2008 during the global financial crisis.
“In deciding to raise the policy interest rate anew, the Monetary Board noted that the latest baseline inflation forecast path has shifted higher relative to the previous assessment. Average inflation is projected to breach the upper end of the 2 percent to 4 percent target range at 6.1 percent in 2023, before returning to within target at 3.1 percent in 2024,” Medalla said.
He said the forecasts were adjusted upwards following the higher-than-expected inflation outturn in January of 8.7 percent and the continued stronger rebound in domestic demand and gross domestic product growth in the fourth quarter of 2022.
Both headline and core inflation measures continued to increase, indicating a further broadening of price pressures, particularly in services, he said.
Oxford Economics said it expects the BSP to raise the policy rate by another 25 basis points in its next meeting in March, before staying put for the rest of the year.
“We think aggressive hiking risks dampening economic outlook this year, when the economy already faces several headwinds, particularly given our lower-than-consensus growth forecast of 4.1 percent,” the London-based think tank said.
“At the same time, its current account deficit leaves the Philippines more exposed to external pressures. If the US economy proves more resilient than expected, the US Fed could hike further, which may again put downward pressures on the peso and force the BSP to tighten more,” Oxford Economics said.
The BSP confirmed that inflation expectations rose further, underscoring the need to preempt the emergence of further second-round effects.
“At the same time, the balance of risks to inflation now leans toward the upside for both 2023 and 2024, with pressures emanating from the potential impact of global food market uncertainties, continued domestic shortages in key food items, additional transport fare hikes amid elevated oil prices and the higher-than-expected wage adjustments in 2023,” Medalla said.
He said the impact of a weaker-than-expected global economic recovery remained the primary downside risk to the inflation outlook.
Medalla said every 50-basis-point hike in policy rate would reduce gross domestic product growth by around 0.04 percent. He said the economy was “quite strong” to absorb the impact of higher interest rates.
The Monetary Board also reiterated its encouragement and support for timely and more aggressive whole-of-government actions to mitigate the impact of persistent supply-side pressures on food prices, including trade‑positive measures and significant progress to boost productivity.
“Given these considerations, the Monetary Board deems a strong follow-through monetary policy response as necessary to reduce the risk of a breach in the inflation target in 2024. An upward adjustment in the policy interest rate would also prevent inflation expectations from drifting further away from the target band,” Medalla said.
He said with domestic growth exceeding expectations in 2022, monetary action could help dampen potential demand-side pressures and second-round effects without unduly hindering the sustained momentum of economic growth.
“The BSP reassures the public that it stands ready to take all necessary policy action to bring inflation to within the 2 percent to 4 percent government target over the medium term, in line with its primary mandate of ensuring price stability,” Medalla said.
When asked what would be the trajectory of policy rate going forward, Medalla said the board was not ruling out anything. “Anything is possible… [maybe] there will be no increase in the next meeting.. [But] if negative shock happens, then I might be wrong.”
“We have to have a very vigilant stance,” Medalla said.