Philippines: Hawkish BSP hikes key rates by 50 bps

MANILA, Philippines — As expected, the Bangko Sentral ng Pilipinas (BSP) yesterday delivered another 50-basis-point rate hike amid the need for follow-through action to help anchor inflation expectations and return inflation to a target-consistent path.

BSP Governor Felipe Medalla said in a virtual press conference that the latest increase brought the interest rate on the central bank’s overnight reverse repurchase facility to 3.75 percent, effective today.

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

The BSP has so far raised interest rates by 175 basis points so far this year to fight inflationary risks after slashing rates by 200 bps to an all-time low of two percent in 2020 as part of its COVID-19 response measures.

The BSP moved forward the withdrawal of extraordinary measures as it started its interest rate liftoff with a 25-bp hike last May 19, followed by another 25 bps last June 23 instead of the original plan of raising rates in the fourth quarter of the year.

During a surprise off-cycle rate-setting meeting last July 14, the Monetary Board delivered a huge 75-bp increase.

Medalla said the central bank raised its inflation forecast to 5.4 instead of five percent for this year, but lowered the projections to four instead of 4.2 percent for 2023 and to 3.2 instead of 3.3 percent for 2024.

The BSP chief pointed out that the inflation target remains at risk over the policy horizon owing to broadening price pressures.

“Elevated inflation expectations likewise highlight the risk of further second-round effects. 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,” Medalla said.

Medalla said inflation is likely to remain elevated and peak in either October or November this year.

“Our forecast is that headline inflation will still increase and will probably peak on the 10th or 11th  month of the year,” the BSP chief said, adding that it would remain high during the first half of next year before easing closer to three percent in the second half.

Medalla explained that the impact of a weaker-than-expected global economic recovery as well as the resurgence of local COVID-19 infections continue to be the main downside risks to the outlook.

Inflation averaged 4.7 percent in the first seven months, staying above the BSP’s two to four percent target range, after quickening to 6.4 percent in July from 6.1 percent in June.

Despite some moderation in economic activity in recent months, Medalla said the overall domestic demand conditions have generally held firm, supported by improved employment outturns and by ample liquidity and credit.

The Philippines booked a gross domestic product (GDP) growth of 7.8 percent in the first half of the year, despite slowing down to 7.4 percent in the second quarter from 8.2 percent in the first quarter.

The Cabinet-level Development Budget Coordination Committee (DBCC) earlier lowered the GDP target to 6.5 to 7.5 percent instead of seven to eight percent due to the impact of soaring inflation as well as the Russia-Ukraine war.

“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,” the BSP chief added.

Medalla cited the importance of balancing the impact of the central bank’s tightening cycle on economic growth.

“If it’s too aggressive, maybe we’ll end up with growth rates way below six percent. So those are the things that we are looking at. Thus far, we think that the recovery is robust enough to absorb further tightening as necessary. Of course I prefer 6.5 percent growth to six percent, but six percent is not so bad,” Medalla said.

For his part, BSP officer-in-charge of the Department of Economic Research Dennis Lapid said the recovery in domestic demand is likely to be sufficiently strong to allow further normalization of monetary policy.

Lapid said the risks to inflation outlook remain skewed toward the upside for 2022 and 2023, but broadly balanced for 2024.

“Inflation is projected to accelerate over the near term, with risks still tilted towards the upside for 2022 and 2023. Inflation expectations have continued to rise and above target for 2022 and 2023,” Lapid said.

ING Bank senior economist Nicholas Mapa said the central bank retained its hawkish bias to cool the red hot inflation as the BSP governor suggested that authorities are not done tightening just yet after delivering another 50-basis point hike.

Mapa said Medalla also recently hinted that the central bank would likely sustain its tightening bias even after the latest rate adjustment.

“Against this backdrop of rising prices, we believe that BSP can carry out 25bp rate increases at each of the remaining policy meetings for the balance of the year. This would take the BSP’s policy rate to 4.50 percent by December,” Mapa added.

The peso barely moved yesterday, shedding 2.8 centavos to close at 55.888 to $1 from Wednesday’s 55.86 to $1. Volume inched up by 2.2 percent to $939.3 million form $918.65 million

“Market participants may have priced-in today’s rate hike as BSP telegraphed the move.  We expect a depreciation bias for the peso in the near term as the import season kicks into high gear,” Mapa said.