WITH expectations that inflation would be higher in the coming months, the Monetary Board on Thursday raised interest rates to its highest level in 13 years.
In a press briefing after its policy rate setting, Bangko Sentral ng Pilipinas (BSP) Governor and Monetary Board Chairperson Felipe M. Medalla said the MB raised interest rates on the BSP’s overnight repurchase facility by 75 basis points (bps) to 5 percent from 4.25 percent.
This is the highest overnight repurchase facility interest rate level since February 2009 when it was also at 5 percent. This was during the Global Financial Crisis.
“The BSP’s latest baseline forecast indicates a high growth path over the policy horizon, with average inflation reaching the upper end of the 2 to 4 percent target range in both 2022 and 2023,” Medalla said in his statement during the briefing.
Based on BSP’s forecast, inflation is now expected to average 5.8 percent in 2022 from the initial forecast of 5.4 percent and 4.3 percent in 2023 from the initial estimate of 4 percent.
However, Medalla said inflation in the second semester of 2023 will be closer to 3 percent than 4 percent. This lends some optimism that inflation could average 3.1 percent in 2024 from the previous forecast of 3.2 percent.
Risks to the BSP’s inflation outlook are “strongly skewed to the upside” especially for 2023 “but broadly balanced for 2024.”
The possible impact of transport fare hikes and the higher prices of vegetables and fruits are considered medium upside risks to the inflation forecast of Monetary Authorities.
Considered low upside risks are higher global food prices; higher sugar prices, which had a relatively low weight in the Consumer Price Index (CPI); and the non-extension of Executive Order 171, which reduced tariffs on certain food imports.
Given these expectations, Medalla also said the monetary authorities decided to also raise interest rates on the overnight deposit and lending rate facilities to 4.5 percent and 5.5 percent, respectively.
Fed rates
Medalla said the BSP expects that the last 75 bps rate hike implemented by the US Federal Reserve would be the last of the four 75 bps rate hikes expected for the year. This, he said, could indicate that no future rate hikes of the same magnitude is expected this year.
He also cited unusual circumstances which led the BSP to have off-cycle interest rate announcements as well as early pronouncements two weeks before the actual policy rate setting.
However, Medalla does not expect these to be repeated. He noted that the last two policy rate hikes implemented by the MB were largely reactions to the increases made by the US Federal Reserve.
If the recent policy rate hikes implemented by the US Federal Reserve were smaller, Medalla said, the Monetary Board’s rate hikes may have also been smaller.
“The things that caused them are also unusual and I think they will not be repeated. For instance, they’re now talking of the Fed making smaller increases. And also to the extent that policy rates are also rising in Europe, in other countries, then the US dollar will not appreciate as much as it used to,” Medalla said.
Oxford Economics said in its briefer on Thursday, following the 75 bps rate hike of the Monetary Board, that it expects the BSP to raise interest rates by 50 bps in December.
This will match the expected move of the US Federal Reserve. The Monetary Board has another policy rate setting meeting on December 15.
However, Oxford Economics expects that with mounting inflation risks, the BSP may decide to tighten monetary policy further in 2023. This could hamper the economy’s growth in the coming quarters.
“We estimate the output gap is still negative, and since the effect of monetary tightening on the economy comes with a certain lag, the BSP may risk overtightening. That said, we see broad dollar strength lingering next year, and should global prices remain higher for longer than we forecast, the BSP might be forced to tighten further next year,” Oxford Economics said.
Nonetheless, Medalla said the targets set by the Development Budget Coordination Committee (DBCC) remain attainable despite the tightening of monetary policy.
Based on the July 2022 DBCC estimates, the target of the administration is for GDP growth to average 6.5 to 8 percent annually between 2023 and 2028.
The BSP also noted that recession expectations in major economies starting next year could bring down oil prices and cool inflation. The Philippines is a net importer of oil and is thus significantly affected by swings in oil prices.
The recession in major economies and slower global economic growth is one of the downside risks to inflation, albeit having a low probability as of the latest estimates of the BSP.
“We think that all the backlog in capital formation during the pandemic, [growth] will remain strong. We’re confident that in spite of the interest rate hike we have done, [growth expectations are] still very, very feasible,” Medalla said.
Inflation in October averaged 7.7 percent, a 14-year high. This was on the back of more expensive food items as Food inflation alone is pegged at 9.8 percent.
The data also showed food and non-alcoholic beverages was recorded at 9.4 percent nationwide and accounted for 80.9 percent of the increase in the country’s inflation print for October.
Meanwhile, the country’s economic growth performance posted a better-than-expected rate of 7.6 percent in the third quarter. This is faster than the 7.5 percent posted in the second quarter of the year and the 7 percent recorded in the same period last year.
The latest GDP print brought the average growth in January to September to 7.7 percent. The government’s GDP growth target for the year is 6.5 percent to 7.5 percent.