THE Bangko Sentral ng Pilipinas (BSP) on Thursday increased its rates for the first time since the pandemic, as the country’s monetary authority tries to get a hold of the rising inflation expectations in the country.
At its meeting, BSP Governor Benjamin Diokno announced that the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase facility by 25 basis points to 2.25 percent, effective Friday, May 20.
Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 1.75 percent and 2.75 percent, respectively.
This is the first time that the BSP hiked its monetary policy rates since implementing an ultra accommodative monetary policy stance to keep the economy afloat during the pandemic. The move to raise rates also comes earlier than Diokno’s previous forward guidance of starting to hike monetary policy rates in the second half of this year.
“In deciding to raise the policy interest rate, the Monetary Board noted that the latest baseline forecasts have further shifted higher since the previous monetary policy meeting in March, indicating that elevated inflation pressures could persist over the policy horizon,” Diokno said.
Latest forecasts from the BSP – which were also announced during the Thursday meeting—pointed to inflation hitting an average of 4.6 percent for this year, from the previous forecast of 4.3 percent. This is a higher deviation from the ceiling of the government’s target for the year of keeping inflation within the 2 to 4 percent band.
For next year, forecasted inflation is also near the ceiling of the 2 to 4 percent target band at 3.9 percent from the earlier forecast of 3.6 percent.
The adjustments, according to the BSP, were based on higher-than-expected inflation prints in recent months, volatility in global oil prices, higher than assumed minimum wage increase in the National Capital Region (NCR) and Region 6, and the stronger domestic growth outlook.
“The balance of risks to the inflation outlook now leans 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,” Diokno said.
BSP officials had also warned on Thursday that inflation could hit as high as 5 percent this year. Inflation is also expected to remain above 4 percent until the first quarter of next year.
“Average inflation could peak in the second quarter of this year at slightly above 5 percent, and hovering at around 5 percent for most of the second half of the year before decelerating in 2023 and going back to target by the second quarter of next year,” BSP Managing Director Zeno Abenoja said.
Second-round effects
Diokno also said second-round effects, or indirect price hikes as a result of higher prices of a major commodity item, have started to appear in the economy.
“The Monetary Board also observed the emergence of second-round effects, including the higher-than-expected adjustment in minimum wages in some regions. Inflation expectations have likewise risen, highlighting the risk posed by sustained pressures on future wage and price outcomes,” Diokno said.
“Given these considerations, 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,” he added.
The BSP said the strong domestic growth as seen in the first quarter of the year has also provided them space to hike rates to control inflation.
Going forward, economists see further rounds of monetary policy tightening from the BSP in a bid to control the rise of prices of consumer goods.
Rizal Commercial Banking Corporation (RCBC) chief economist Michael Ricafort, in his analysis after the monetary policy meeting, said policy rate hikes in the coming months could be needed to address the risk of second-round inflation effects after the approved minimum wage hikes and possible hike in transport fares, all of which would lead to higher prices of other affected goods and services in the economy.
“It is a tough and delicate balancing act in managing the monetary policy, going forward, to prevent inflation from spiraling further, while at the same time, helping sustain the fragile economic recovery prospects still reeling from the adverse effects of the pandemic that could be jeopardized by any premature tightening of monetary policy that may not be necessarily effective in curbing supply-side inflationary pressures,” Ricafort said.
Economists at Bank of the Philippine Islands (BPI), on the other hand, now expect at least 100 basis point hikes from the BSP this year from 75 basis points previously.
“Even with a 100-basis-point rate hike this year, the policy rate will still be below historical and prepandemic levels. Furthermore, the impact of rate hikes is usually gradual and the economy has the capacity to absorb slightly higher interest rates especially now that demand is almost back to pre-pandemic level,” BPI said in its analysis.
“A more significant risk to the country’s economic prospects is inflation and the depreciation of the Peso, which will increase the cost of oil that the country imports from abroad on top of the increase brought by the conflict in Ukraine. A prolonged period of elevated oil and coal prices may eventually lead to second round effects that could make inflation more entrenched,” the bank added.