BSP pushes key rate to 14-year high  

MANILA, Philippines — As expected, the Bangko Sentral ng Pilipinas (BSP) delivered an aggressive 75-basis-point rate hike, bringing the benchmark rate to a 14-year high of five percent to help insulate the Philippine economy from external headwinds and exchange rate fluctuations that could further entrench price pressures.

In a virtual press conference, BSP Governor Felipe Medalla announced that the interest rates on the overnight deposit and lending facilities were also raised by 75 basis points to 4.5 percent and 5.5 percent, respectively.

The overnight reverse repurchase rate is the highest since the 5.5 percent in December 2008.

Medalla earlier committed to match the aggressive rate hikes delivered by the US Federal Reserve to maintain a differential of at least 100 basis points to ensure stability in the peso-US dollar exchange rate.

“A sizeable adjustment in the policy interest rate will help insulate the economy from external headwinds and exchange rate fluctuations that could further entrench price pressures and potentially dislodge inflation expectations,” Medalla said.

Medalla, who also chairs the seven-member Monetary Board, said the latest baseline forecasts indicate a higher inflation path over the policy horizon, with average inflation breaching the upper end of the two to four percent target range this year and next year before easing back to within the target in 2024.

In deciding to raise the policy interest rate anew, the BSP chief said the Monetary Board noted that core inflation has risen sharply in October, indicating stronger pass-through of elevated food and energy prices, as well as demand-side impulses on inflation.

“Given the increased likelihood of further second-round effects, persistent inflationary pressures and the predominance of upside risks to the inflation outlook, the Monetary Board recognized the need for aggressive monetary policy action to safeguard price stability,” Medalla said.

Inflation averaged 5.4 percent from January to October after accelerating to a 14-year high of 7.7 percent in October from. 6.9 percent in September.

“At the same time, the risks to the inflation outlook lean strongly toward the upside until 2023, while remaining broadly balanced in 2024,” Medalla said.

According to Medalla, the Monetary Board has also been reassured by the timely non-monetary government interventions to mitigate the impact of persistent supply-side pressures on commodity prices, including those aimed at alleviating supply shortages and strengthening farm productivity,.

With the strong growth of the economy in the third quarter, Medalla said domestic demand is seen to hold firm owing to improved employment outturns, investment activity, and consumer spending.

The country’s gross domestic product (GDP) expanded by 7.7 percent from January to September this year after a stronger-than-expected expansion of 7.6 percent in the third quarter from 7.5 percent in the second quarter despite the series of rate hikes imposed by the central bank to tame inflation, as well as the continued weakening of the peso.

Dennis Lapid, officer-in-charge of the BSP’s Department of Economic Research, said the Monetary Board raised its inflation forecasts to 5.8 instead of 5.6 percent for this year, to 4.3 instead of 4.1 percent in 2023, and to 3.1 instead of three percent in 2024.

Upside risks to inflation are associated with elevated international food prices owing to higher fertilizer costs, trade restrictions, and adverse weather conditions.

On the domestic front, the impact of weather disturbances on the prices of fruits and vegetables, supply disruptions in key food commodities such as sugar and meat, as well as pending petitions for transport fare hikes could also exert upward pressures on inflation.

Meanwhile, the impact of a weaker-than-expected global economic recovery continues to be the main downside risk to the outlook.

Looking ahead, the BSP said it would continue to take all necessary action to bring inflation back within the target band over the medium term, in keeping with its primary mandate to sustain price and financial stability.

ING Bank senior economist Nicholas Mapa said the central bank’s Monetary Board would likely hike interest rates by another 50 basis points to 5.5 percent next month given the 50-basis point increase by the US Fed next month.

“BSP will likely retain its hawkish tone given its recent adjustment to inflation forecasts for both 2022 and 2023,” Mapa said.

According to Mapa, the punchy 75-basis point increase to the overnight reverse repurchase rate was warranted given the surging domestic inflation.

“BSP believes that the domestic economy can handle the rapid-fire tightening, with growth expected to hold firm as evidenced by the third quarter GDP performance,” Mapa said.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said further local policy rate hikes are still possible for the coming months, as supported by generally stronger economic data, future US Fed rate hikes, as well as the behavior of the peso exchange rate.

“Still relatively weaker peso in recent months could still increase the possibility of further local policy rate hikes amid recent signals on possibly matching future Fed rate hikes if inflation remains high,” Ricafort said.