BSP ready to raise rates to tame price pressures

MANILA, Philippines — Monetary authorities are prepared to raise interest rates, as necessary, to prevent further broadening of price pressures as inflation quickened anew in August, according to the Bangko Sentral ng Pilipinas.

“The BSP stands ready to adjust the monetary policy stance, as necessary, to prevent the further broadening of price pressures, as well as the emergence of additional second order effects in view of the persistent upside risks to the inflation outlook,” the central bank said in a statement.

The BSP said it also continues to support the timely and effective implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation.

Inflation averaged 6.6 percent from January to August this year after accelerating to 5.3 percent last month – ending six straight months of easing – due to higher prices for oil and key agricultural commodities.

Despite the sharp uptick, the BSP is confident that inflation will decelerate back to within its two to four percent target range by the fourth quarter of the year.

“Inflation is likewise expected to remain elevated in the coming months due to continued impact of supply shocks on food prices and the rise in global oil prices. Nonetheless, inflation is still projected to decelerate back to within the inflation target by Q4 2023,” the central bank added.

According to the BSP, the balance of risks to the inflation outlook continues to lean toward the upside owing to the potential impact of additional transport fare increases, higher-than-expected minimum wage adjustments in other regions, persistent supply constraints for key food items, El Niño weather conditions, and possible knock-on effects of higher toll rates on prices of key agricultural items.

The BSP has been the most aggressive central bank in the region after raising key policy rates by 425 basis points between May last year and March this year to tame inflation and stabilize the peso that hit an all-time low of 59 to $1 last October.

The central bank’s Monetary Board maintained a hawkish pause in three straight rate-setting meetings between May and August this year as inflation eased for six straight months after peaking at 8.7 percent last January.

However, it raised its inflation forecasts to 5.6 percent from 5.4 percent for this year, 3.3 percent from 2.9 percent for 2024 and 3.4 percent from 3.2 percent for 2025 amid rising global oil prices, higher than expected wage adjustments, and the recent developments wherein the peso almost touched the 57 to $1 level.

On the other hand, the BSP said the impact of a weaker-than-expected global economic recovery remains the primary downside risk to the outlook.

Due to elevated inflation and high interest rates, the country’s gross domestic product (GDP) growth slackened to 4.3 percent in the second quarter from 6.4 percent in the first quarter of the year.

This brought the average growth to 5.3 percent in the fist semester of the year, well below the six to seven percent target range penned by economic managers via the Development Budget Coordination Committee (DBCC).

The government is confident the economy will grow by at least 6.6 percent in the second half of the year to meet the lower end of the six to seven percent target range.

ING Bank senior economist Nicholas Mapa said the  Monetary Board is likely to hold interest rates steady, but could consider a rate hike if the inflation uptick becomes a trend.

Mapa said the “Crucial 3” that includes rice, transport and electricity costs would determine the inflation path for the next few months.

“A hike may be the last thing BSP wants to do after the Q2 GDP stumbled, but a data-dependent BSP Governor Eli Remolona Jr. won’t rule out tightening if needed,” Mapa said.