BSP hints at further tightening vs inflation

Rate hike expected at 25-50 bps today

MANILA, Philippines — The Bangko Sentral ng Pilipinas is not ruling out further tightening after the widely expected interest rate hike today to tame inflation back to within the BSP’s two to four percent target range starting next year.

BSP Governor Felipe Medalla told participants of the 2022 EJAP-SMC Economic Forum that the Monetary Board is likely to deliver another 25 to 50-basis-point rate hike today.

“I already said that – not zero, not 75 (basis points). So it’s probably more than a coin toss, but I will not say which side of the coin is heavier,” Medalla said yesterday.

To fight rising inflationary pressures and stabilize the peso, the BSP has raised interest rates by 125 basis points so far this year, bringing the reverse repurchase rate to 3.25 percent from an all-time low of two percent.

After the back-to-back 25-basis-point rate hikes last May 19 and June 23, the BSP delivered a huge 75-basis-point increase during a surprise off-cycle meeting last July 14 to temper mounting risks and manage spillovers from other countries that could potentially disanchor inflation expectations.

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

Medalla said inflation this year is sure to breach the central bank’s target range, but authorities are committed to bring the consumer price index (CPI) back to within the target starting next year.

“As to whether there will be more rate hikes in the remaining meetings (this year), we will not rule them out. Because as you know, we want the midpoint of the forecast for next year to be below four (percent) and for midpoint, the forecast for 2024 to be as close to three (percent) as possible,” the BSP chief said.

After an easing cycle that saw interest rates slashed by 200 basis points as part of COVID response measures in 2020, the BSP has turned hawkish through a more aggressive and earlier withdrawal of support measures to address soaring inflation.

According to Medalla, the Monetary Board could keep interest rates steady or deliver hikes of 25 to 50 basis points in the coming meetings depending on the data.

“Now, exactly how many rate hikes that will require, it’s hard to forecast because a lot of the things that drive inflation may subside,” Medalla said.

“So if those factors work in our direction, if food supply improves, petroleum prices fall, then we will need fewer rate hikes, possibly no more rate hikes after tomorrow (today). But I think one has to be quite lucky for that to happen,” Medalla told participants of the forum.

Despite the slower gross domestic product (GDP) growth in the second quarter, the BSP governor said the economy is strong enough to absorb rate increases.

The country’s GDP expanded by 7.8 percent in the first half despite the disappointing 7.4 percent growth in the second quarter, slower than the 8.2 percent in the first quarter, as soaring prices affected consumption.

Medalla said the BSP stands ready to take the necessary policy actions and focus its efforts on anchoring inflation expectations by bringing it back to the target range over the medium term.