Philippines: BSP tempers inflation attack; hikes rates by 50 basis points

MANILA, Philippines (Update 1, 3:20 p.m.) — The Bangko Sentral ng Pilipinas hiked its key policy rate again on Thursday in a bid to arrest red-hot inflation dampening the economy’s recovery efforts. 

The Monetary Board raised the benchmark rate by 50 basis points to 3.75% after its rate-setting meeting.

Today’s announcement came as no surprise as BSP Governor Felipe Medalla said in a forum yesterday that the interest rate hike would only range from 25 or 50 bps. 

“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,” the BSP said in a statement.

“Meanwhile, 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,” it added.

“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 central bank continued.

Interest rates saw their largest tweak this year after an emergency policy meeting last month, when the BSP unleased a 75 bps hike. Rate hikes seep into the domestic economy six months or so after the central bank sets it, as was the case when credit growth broke an eight-month losing streak in August 2021. 

Banks and financial institutions use this benchmark rate for setting interest rates on loans. 

For Nicholas Antonio Mapa, senior economist for ING Bank in Manila, recent macroeconomic data justified today’s action.

“BSP to remain hawkish with a 50bp rate increase. Inflation is above target and growth is decent,” he said in a Viber message. 

Inflation in July expanded to 6.4% year-on-year, while second-quarter growth disappointed as it grew 7.4% on an annual basis amid expensive fuel prices and a strong dollar trend. 

“BSP also likely to retain hawkish tilt for the rest of year,” Mapa added. 

Jun Neri, lead economist at Bank of the Philippine Islands, explained in a series of tweets why the BSP needed to hike the reverse repurchase rate 50 bps. 

“PHP is the weakest in ASEAN-5 again this week & could reverse its recent course if BSP hike is < 50bps,” he tweeted on Aug. 12. 

Likewise, Neri said that the BSP might be compelled to deviate from its pronouncements and hike off-cycle if the US Federal Reserve hikes aggressively. 

As it is, the central bank departed from its accommodative monetary policy stance in May to support a Philippine economy kicking off recovery from the pandemic. The BSP aggressively cut interest rates back in 2020 in a bid to encourage credit growth in a consumption-starved economy.