Philippines: BSP matches Fed’s 50-bps rate increase

MANILA, Philippines — As widely expected, the Bangko Sentral ng Pilipinas (BSP) delivered a softer 50-basis-point hike at the last rate-setting meeting of the Monetary Board for the year, as inflation is seen accelerating further and peaking this month.

This brings the benchmark interest rate to a 14-year high of 5.50 percent, the highest since six percent in November 2008, from an all-time low of two percent. The overnight deposit rate was also raised to five from 4.50 percent, while the overnight lending was increased to six from 5.50 percent.

The hike also matched the 50-basis-point hike delivered by the US Federal Reserve. The central bank has raised key policy rates by 350 basis points (bps) this year.

In a press conference, BSP Governor Felipe Medalla said the Monetary Board arrived at its decision after noting the further uptick in headline and the sharp rise in core inflation in November amid pent-up demand.

“Moreover, upside risks continue to dominate the inflation outlook up to 2023 while remaining broadly balanced in 2024. The expected upside risks to inflation over the policy horizon stem mainly from elevated international food prices due to high fertilizer prices and supply chain constraints,” Medalla said.

The Monetary Board decided to retain its inflation forecast at 5.8 percent for this year, but hiked its projection to 4.5 percent instead of 4.3 percent for next year.

“The BSP’s latest baseline forecasts show that average inflation is still projected to breach the upper end of the two to four percent target range for 2022 and 2023 at 5.8 percent and 4.5 percent, respectively,” Medalla said.

Inflation averaged 5.6 percent from January to November this year, well above the BSP’s two to four percent target range. It accelerated to a 14-year high of eight percent in November from 7.7 percent in October.

On the domestic front, the BSP chief explained that trade restrictions, the increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare hikes, as well as potential wage adjustments in 2023 could push inflation upwards.

At the same time, Medalla said that the impact of a weaker-than-expected global economic recovery continues to be the primary downside risk to the outlook.

“Amid broad-based inflation pressures, persistent upside risks to inflation, and elevated inflation expectations, the Monetary Board deems it necessary to take aggressive monetary action to bring headline inflation back to within target as soon as possible,” Medalla added

Furthermore, the BSP chief said that an adjustment in the policy interest rate would continue to provide a cushion against external spillovers amid tighter global financial conditions.

According to Medalla, inflation is seen decelerating, but would remain elevated in the first half of next year after peaking in December, before reverting to within the two to four percent target by the third quarter and approach the low end of the target by the fourth quarter of 2023 and first quarter of 2024 due to base effects.

For 2024, the central bank sees inflation easing to 2.8 percent instead of 3.1 percent due to the further easing in oil prices in 2023 and 2024, as well as the appreciation of the peso against the US dollar and cumulative policy rate adjustments.

Medalla said that it was likely the last 50-basis point hike by the central bank’s Monetary Board, as softer rate increases could be delivered next year in light of the easing inflation and stable peso.

The more favorable inflation dynamics overseas, he said, certainly allows consideration for more moderate pace of increase in the overnight reverse repurchase rate.

“Having said that, the impact of monetary policy also takes time to manifest fully in inflation and GDP (gross domestic product) data, and we prefer to see how our previous policy adjustments will influence the future inflation path in assessing the need for policy action,” Medalla said.

Clearly, Medalla said, there is no basis for ruling out any further action next year, but is hard to say how much.

“If I were to bet my money, I would not bet that the current rate is the terminal rate,” Medalla said.

According to ING Bank senior economist Nicholas Mapa, the less aggressive rate hike delivered by the US Fed gives the BSP room to reverse its tightening cycle by the second half of next year.

“Softer pressure on spot allow BSP to match the Fed with the RRP now clearly in restrictive territory at 5.5 percent. More rate hikes likely to come in 2023, but cuts a possibility in the second half of 2023,” Mapa said.

To dampen demand, monetary authorities raise interest rates to put less pressure on inflation.