With eye on inflation, BSP hikes rates by 50 bps

THE Bangko Sentral ng Pilipinas (BSP) chose the more aggressive path to monetary policy tightening, as it unleashed a fresh 50-basis-point hike in its main benchmark rates on Thursday.

In the monetary policy virtual press briefing, BSP Governor Felipe Medalla said the decision came as their latest baseline forecast for inflation has shifted higher for 2022.

Medalla said the Monetary Board decided to raise the interest rate on the BSP’s overnight reverse repurchase facility by 50 basis points to 3.75 percent, effective August 19.

Accordingly, the interest rates on the overnight deposit and lending facilities were raised to 3.25 percent and 4.25 percent, respectively.

Just last month, the BSP also tightened its monetary policy via an off-cycle hike of 75 basis points. Medalla has been telling markets since that they will still likely hike rates in their August meeting by either 25 or 50 basis points.

According to the latest BSP projections announced on Thursday, average inflation is projected to further deviate from the 2 to 4 percent target range of the government for the year at 5.4 percent.

In their June meeting, the BSP’s forecast for 2022 inflation was to average at 5 percent.

In contrasting, inflation forecasts for 2023 and 2023 have declined. Inflation for next year is now expected to hit 4 percent on average, down slightly from the 4.2-percent forecast in June.

For 2024, inflation is expected to fall further into the target range at 3.2 percent from the 3.3-percent forecast in June.

Despite this, Medalla said the increase in the 2022 inflation forecast showed that the inflation target still remains at risk over the policy horizon owing to broadening price pressures. Elevated inflation expectations likewise highlight the risk of further second-round effects.

In assessing risks, the governor said upside risks also continue to dominate the inflation outlook up to 2023 due to the potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, the sharp increase in the price of sugar, as well as pending petitions for transport fare increases.

“For these reasons, the Monetary Board deemed further monetary action to be necessary to anchor inflation expectations and avoid a further breach in the inflation target over the policy horizon. The favorable growth outcome in the first half of the year also gives the BSP the flexibility to act against inflation pressures while allowing domestic demand to sustain its recovery momentum amid prevailing headwinds,” Medalla said.

“The BSP reassures the public of its commitment and readiness to take all necessary actions to steer inflation towards a target-consistent path over the medium term in keeping with its price and financial stability mandates,” the governor added.

Medalla also said the BSP continues to urge timely non-monetary government interventions to mitigate the impact of persistent supply-side pressures on commodity prices.

More rate hikes?

Asked if there will be more rate hikes in the coming meetings, Medalla said the BSP currently does not have the data yet to make an effective guidance at this point.

“I wish I could tell you ‘this is the last increase’. I wish I could tell you that even if this is not the last increase, the next one will be the last. But the data and information that is needed to be able to say that is not available at the moment,” the governor said.

What he did say is that while it is “impossible” to hike rates without affecting economic growth, Philippine recovery is “robust enough” to absorb further tightening if necessary.

The governor also said that between inflation and growth, their priority is bringing down the prices of goods and services as one of the BSP’s pillar mandates.

Local bank economists, meanwhile, foresee the BSP hiking interest rates further later this year to control inflationary pressures.

“Policy rate hike/s in the coming months could be needed to address risk of second-round inflation effects after the approved minimum wage hikes and the hike in the minimum transport fares from June-July 2022, all of which would lead to higher prices of other affected goods and services in the economy,” Rizal Commercial Banking Corporation (RCBC) chief economist Michael Ricafort said.

Bank of the Philippine Islands (BPI) economists said in their analysis of the BSP’s recent move that although a slowdown in August consumer prices is a possibility due to high base effects, inflation “will remain a challenge” until the first half of 2023.

“We are still yet to see the peak in inflation near 7 percent in October should global price pressures from oil, energy and food remain substantial. In this scenario, average inflation is expected to settle between 5 and 5.5 percent. Given this, the BSP may hike again by at least 25 basis points in its November policy meeting,” BPI said.


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