BSP hikes rates to 2.25% first time in 3 years

MANILA, Philippines — As widely expected, the Bangko Sentral ng Pilipinas (BSP) delivered its first rate hike in more than three years by raising policy rates by 25 basis points, bringing the benchmark rate to 2.25 percent from an all-time low of two percent.

BSP Governor Benjamin Diokno, in a virtual press conference, said the Monetary Board decided to raise interest rates on the back of the strong rebound in domestic economic activity and labor market conditions in the first quarter of the year, as well as quickening inflation.

The interest rate liftoff also raised the interest rates on the overnight deposit to 1.75 percent from 1.50 percent, and overnight lending facilities to 2.75 percent from 2.50 percent.

The last time the BSP delivered a rate hike was in November 2018 when it raised key policy rates by 25 basis points to 4.75 percent.

In 2018, the central bank lifted interest rates by 175 basis points from three percent due to soaring global oil prices.

“The Monetary Board noted that the strong rebound in domestic economic activity and labor market conditions during the first quarter of 2022 provides scope for the BSP to continue rolling back its pandemic-induced interventions, consistent with its exit strategy from monetary accommodation,” Diokno said.

Since 2019, the BSP has maintained a loose and expansionary policy after key policy rates were reduced by 275 basis points, including by 200 basis points in 2020 as part of COVID response measures, which brought the benchmark rate at an all-time low of two percent.

The Philippines booked a stronger-than-expected gross domestic product (GDP) growth of 8.3 percent in the first quarter, well within the government’s seven to nine percent target from 7.8 percent in the fourth quarter and reversing the 3.8 percent contraction in the first quarter of last year.

Diokno, who chairs the Monetary Board, said that the government is set to settle the reduced P300 billion provisional advances on May 20 or ahead of the June 11 maturity date as the economy continues to recover from the pandemic-induced recession.

Given ample liquidity, a gradual recovery in credit activity and stable financial market conditions, Diokno said the central bank has decided to reconfigure the BSP’s government securities purchasing window from a crisis intervention measure into a regular liquidity facility under the interest rate corridor framework.

“As part of the BSP’s standard monetary operations toolkit for injecting liquidity into the financial market, the recalibrated government securities purchasing window shall enhance the BSP’s ability to manage domestic liquidity conditions and ensure the sustainability of its balance sheet,” Diokno said.

According to the BSP chief, the Monetary Board also noted that the latest baseline forecasts have further shifted higher since the previous monetary policy meeting in March, indicating that elevated inflation pressures could persist over the policy horizon.

Inflation quickened to 4.9 percent in April, the highest in more than three years and exceeding the BSP’s two to four percent target from four percent in March due to elevated fuel and food prices.

Given recent developments, including the stronger domestic economic growth, as well as the series of wage hikes approved by the government, Diokno said inflation could likely exceed five percent in the next few months before slowing down and reverting to within the two to four percent target by the middle of 2023 as the effects on global commodity price shocks dissipate.

“Given these considerations, the Monetary Board believes that a timely increase in the BSP’s policy interest rate will help arrest further second-round effects and temper the buildup in inflation expectations,” Diokno added.

Diokno said the Monetary Board also observed the emergence of second-round effects, including the higher-than-expected adjustment in minimum wages in some regions.

Furthermore, Diokno said  inflation expectations have likewise risen, highlighting the risk posed by sustained pressures on future wage and price outcomes.

“On balance, persistent inflationary pressures point to the need for prompt monetary action to anchor inflation expectations. As the economic recovery continues to gain traction, the BSP shall proceed with its plans for the continued gradual withdrawal of its extraordinary liquidity interventions and the start of the normalization of its monetary policy settings,” the BSP chief said.

For his part, BSP managing director Zeno Ronald Abenoja said the Monetary Board raised its inflation forecasts to 4.6 instead of 4.3 percent for this year due to higher inflation in March and April, and to 3.9 instead of 3.6 percent for next year.

Abenoja said that the balance of risks to the inflation outlook now leans toward the upside for both 2022 and 2023, with upside pressures emanating from the potential impact of higher oil prices, including on transport fares, as well as the continued shortage in domestic pork and fish supply.

On the other hand, Abenoja said that downside risks are linked mainly to the potential impact of a weaker-than-expected global economic recovery amid the lingering threat of COVID-19 infections, heightened geopolitical tensions, and a tightening of global financial conditions.

Abenoja said that the central bank reiterates its support for the sustained implementation of non-monetary interventions to mitigate the impact of persistent supply-side factors on inflation, particularly food supply and prices.

After months of staying dovish, ING Bank Manila senior economist Nicholas Mapa said the BSP finally whipped out a rate hike as inflation continues to heat up.

“We expect BSP to retain its hawkish stance, with the central bank likely to offload up to 75 basis points worth of rate hikes in 2022,” Mapa said.

For his part, Rizal Commercial Banking Corp. chief economist Michael Ricafort said higher local policy rate, in line with the aggressive rate hikes by the US Federal Reserve, could lead to some pick up borrowing/financing costs for consumers, businesses, and other institutions.

Ricafort said that Inflation in recent months is largely due to supply-side factors, not due to higher demand.

“So any local policy rate hike may not be necessarily effective in addressing these supply-side inflationary pressures, largely due to external/exogenous factors, such as higher global oil or energy and other commodity prices largely due to Russia’s invasion/war with Ukraine, all of which are beyond the country’s reasonable control,” Ricafort said.