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Philippines: BSP delivers small rate hike on peak inflation hopes
MANILA, Philippines — The Bangko Sentral ng Pilipinas hiked interest rates on Thursday in a bid to contain brutal inflation that has sapped the public’s purchasing power.
Following the Monetary Board’s meeting on Thursday, the BSP injected 25 basis points into its benchmark lending rate.
This brought the key rate to 6.25% since the central bank started tightening its monetary policy in May last year. The policy rate last hovered this high back in November 2008, when it stood at 6%.
At the same time, the latest tightening unsurprisingly matched the US Federal Reserve’s similar move earlier today.
“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.
Central banks, like the BSP, use rate hikes to rein in demand pressures that are stoking price growth. The higher interest rates work by prompting consumers and businesses to think twice about borrowing money. This, in turn, lessens the money that’s circulating in the economy and chasing a limited supply of consumer items.
However, the rate hike comes at a precarious period for the domestic economy. The Philippines is still reeling from pandemic fallout, but the combined threats of inflation, supply bottlenecks and a grim global economic outlook, could derail its recovery.
But the Philippine economy found pockets of growth amid rising inflation in the past year, thanks largely to an explosion in consumer spending.
An era of expensive borrowing costs shone the spotlight on banks, particularly in the US since the closure of three banks threatened to spread financial contagion across the world.
Nicholas Antonio Mapa, senior economist at ING Bank in Manila, attributed the BSP’s rate action to inflationary woes.
“BSP needs to display commitment to price stability, even for a little longer,” he said in an emailed commentary.
Nevertheless, the ING economist is expecting the BSP to hit pause on its aggressive rate hikes by May.
“If inflation slows further we could even see Gov. Medalla cut reserve requirements if BSP does pause. RR cuts will only be carried out with inflation slowing after Gov Medalla learned hard lessons from 2018,” Mapa added.
Miguel Chanco, economist at Pantheon Macroeconomics, believes today’s rate hike will be the BSP’s last, as more rapid and sustained disinflation is imminent.
“Favourable base effects from last year’s price surge will take hold from this month, and we maintain that it’s only a matter of time before the Philippines starts to import the deflation in global food prices. Moreover, the outlook for global oil prices this year remains benign,” Chanco said.
Rate cuts when?
The BSP also revised its inflation forecast for this year and the next, on the basis of a gloomy global outlook and the impact of the interest rate hikes. For 2023, the central bank expects inflation to average 6% from the previous 6.1%, breaching its 2-4% while in 2024, they forecast inflation to move at a pace of 2.9%.
Even then, the BSP is unsure whether it would keep raising the benchmark rate in its next meeting as Governor Felipe Medalla indicated it was too early to tell.
“In the absence of new shocks, we think we’re moving in the right direction,” Medalla said.
That said, the impact of the BSP’s aggressive rate hikes has been felt within loans. The BSP said that the tightening of the monetary policy stance softened loan growth, as housing loans were responsible for the slowdown.
Medalla explained that the BSP would only start cutting rates once monthly inflation returns to the government’s target which, he said, might happen in November or December this year.
“Any reversal of tightening will have to happen after that,” Medalla said.
Source: https://www.philstar.com/business/2023/03/23/2253828/bsp-delivers-small-rate-hike-peak-inflation-hopes