WITH commodity prices still high, the Bangko Sentral ng Pilipinas (BSP) decided to continue raising interest rates in its meeting on Thursday.
The Monetary Board raised the BSP’s overnight reverse repurchase facility by 25 basis points (bps) to 6.25 percent, effective Friday, March 24, 2023.
The BSP said with this, the interest rates on the overnight deposit and lending facilities will be set to 5.75 percent and 6.75 percent, respectively.
“The Monetary Board’s decision was based on the sum of new information and its assessment of the effects of past policy actions, which warranted a continuation of monetary tightening to anchor inflation expectations,” the BSP said in a statement.
“With core inflation rising in February despite a modest decline in headline inflation, further monetary policy action was deemed necessary to address broadening price impulses emanating from robust domestic demand and lingering supply-side constraints,” it added.
During the briefing, BSP Governor Felipe M. Medalla said while the US Federal Reserve also decided to raise interest rates by 25 bps on Wednesday, this did not factor in the decision of the MB.
He added that in the future, the BSP may no longer track the US Federal Reserve’s movements. Medalla said if the Federal Open Market Committee (FOMC) decides to pause on rate hikes, the BSP may not be keen on doing the same based solely on the movement of the US monetary authorities.
Medalla said future actions by the Monetary Board will be “data-dependent.” He noted that while the recent headline inflation showed prices slowing, considering the seasonality of prices would show that inflation continued to increase.
Being data-dependent also means that if prices remain high, the MB may raise rates or in the event that there won’t be movements on the Consumer Price Index (CPI), that will be the only time the BSP may decide to reverse interest rates.
“It’s easy to talk about when we might pause but when we’ll start reversing, that will require quite a bit of data. Now, what will cause us to reverse? In an extreme case, the price index does not change from now until say July or August,” Medalla said during the briefing.
“So not only is inflation going down, the prices are not going up. Then in that case, we might consider reversing. But that is a very unlikely scenario,” he added.
During the briefing, BSP Deputy Governor Francisco Dakila Jr. said the BSP’s baseline inflation forecast is now 6 percent for 2023. This is slightly lower than the initial estimate of 6.1 percent.
For 2024, Dakila said the BSP’s inflation baseline was also reduced to 2.9 percent from the initial baseline of 3.1 percent.
With lower inflation expectations, the BSP said, its nowcast for economic growth is at 7 percent this year. However, its full-year forecast remains at 6.5 percent.
The optimism stems from expectations that the 25-bps rate hike on Thursday would only affect full-year GDP by 2 bps. This is as of March 2023. “Anchoring inflation is our highest priority,” Medalla said.
Oxford Economics, RCBC
Despite the lower inflation estimates from the BSP, think tank Oxford Economics still expects monetary authorities to raise interest rates by another 25 bps at the next MB meeting in May 2023.
“We expect the BSP to raise the policy rate again by 25bps at its May meeting, before holding the rate at that level throughout the year,” Oxford Economics said in a statement.
“We look for inflation to trend down barring another supply shock, which will make the BSP comfortable staying put. However, risk of further/bigger hikes cannot be ruled out if the peso depreciates a lot given ongoing external pressures,” it added.
Rizal Commercial Banking Corporation (RCBC) Chief Economist Michael Ricafort also expects the BSP to raise interest rates by 25 bps or pause rate hikes in May 2023.
The odds of future Fed rate hikes were reduced recently amid stresses in some parts of the US financial markets after US bank failures—Silicon Valley Bank, Signature Bank—that would require more support measures such as less Fed rate hikes, at the very least, Ricafort said.
Earlier, the BSP said the Philippine banking system and the entire economy can withstand the impact of the blight that recently engulfed some foreign banks.
BSP Governor told reporters on Monday that recent developments such as the collapse of some banks in the United States as well as the recent acquisition of Credit Suisse Group (CSG) AG by UBS Group AG through a “government-brokered deal” will not have an impact on the global economy, including the Philippines.
Medalla said the BSP will closely monitor these developments as well as “assess their impact on the banking system and respond accordingly.”
In a note, the BSP chief assured the President that the banking sector can “withstand possible shocks” that could emanate from the collapse of Silicon Valley Bank (SVB) and Signature Bank.
Medalla also said losses of Philippine banks from rising interest rates are smaller relative to their counterparts in the United States.
He noted that the interest rate hikes of the US Federal Reserve were larger. The US Fed, as of Wednesday, has already raised key policy interest rates by 475 bps.
