BSP lifts key rate by 25 bps to 6.5%

The Bangko Sentral ng Pilipinas (BSP) on Thursday delivered an off-cycle 25-basis-point (bp) rate hike, as it warned inflation will remain above the 2-4% target range until the middle of 2024.

The Monetary Board raised its target repurchase rate to 6.5%, the highest in 16 years, or since the 7.5% seen in May 2007. Rates on the overnight deposit and lending facilities were also raised by 25 bps to 6% (from 5.75%) and 7% (from 6.75%), respectively. 

The BSP’s first policy move in seven months brought the cumulative rate increases since May 2022 to 450 bps.

“The Monetary Board recognized the need for this urgent monetary action to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations,” BSP Governor Eli M. Remolona, Jr. said at a press briefing on Thursday afternoon.   

The BSP’s off-cycle rate hike came ahead of its regular policy meeting scheduled on Nov. 16.

Mr. Remolona said further tightening may be considered at the next Monetary Board meeting.

“We will consider it if things are worse than we thought. We are hoping the data are nicer to us. But if not, then we will have to consider a further rate hike,” he said.

‘Tighter for longer’
Mr. Remolona said the decision to resume monetary tightening was based on the BSP’s latest baseline projections that “point to an elevated inflation path over the policy horizon as upside risks continue to manifest.”

He said that the staff risk-adjusted forecast for 2024 rose to 4.7% from 4.3% previously, well above the 2-4% target range.

“Looking ahead, the Monetary Board deems it necessary to keep monetary policy settings tighter for longer until inflationary expectations are better anchored and a sustained downward trend in inflation becomes evident,” Mr. Remolona said. 

Mr. Remolona, who took office in July, admitted the Monetary Board was a “little behind” in monetary tightening, and should have hiked policy rates at its September meeting.

“We did not look closely enough at expectations,” he said, particularly the BSP’s household expectations survey. “About 92% of consumers think that in the next 12 months inflation will be above 4%. It is similar for expectations by firms.”

Headline inflation rose for a second straight month to 6.1% in September from 5.3% in August. It marked the 18^th straight month that inflation exceeded the central bank’s 2-4% target. Year to date, inflation averaged 6.6%.

Mr. Remolona said risks to the inflation outlook remain on the upside, as higher transport costs, electricity rates, oil prices, and wage adjustments may contribute to faster inflation.

On the other hand, weaker-than-expected global recovery and government measures to mitigate the impact of the El Niño weather event could temper inflationary pressures.

The BSP governor also noted that inflation is unlikely to return to the 2-4% target range this year. 

“In fact, I think from March to July next year, the headline inflation will be very likely above 4%. That’s what our model says,” he said, adding that inflation will start slowing down by July.

In assessing future policy moves, Mr. Remolona said the BSP will look at October inflation and the third-quarter gross domestic product (GDP) data.

He expects GDP growth to settle around 4.5% in the third quarter, slightly faster than the 4.3% growth in the second quarter.

Mr. Remolona reiterated that the aggressive tightening has not affected the Philippines’ growth prospects, but pent-up demand is waning.

“The country’s medium-term growth prospects remain largely intact. The Monetary Board is closely monitoring the impact of the increase in interest rates as these work their way through the economy,” he said.

Earlier, National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan has repeatedly cautioned against further rate hikes, saying that it will have a long-term impact on the economy.

Analysts were not surprised by the Monetary Board’s move, which was telegraphed by Mr. Remolona earlier this week.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the market had been expecting further tightening by the BSP.

“We therefore expect at least one more rate hike from the BSP before the end of the year,” he said.

However, inflation will likely stay elevated until supply-side interventions are implemented.

“Against this backdrop of higher rates and inflation, economic growth appears to be slowing and we believe the full impact of previous BSP tightening will be felt by early 2024,” Mr. Mapa said.

ING Bank sees GDP at 4.7% this year and 4.5% in 2024, while inflation may average 6% in 2023 and 4% next year.

Capital Economics Emerging Asia Economist Shivaan Tandon said the 25-bp off-cycle move will provide support to the peso.

The local currency closed at P56.96 versus the dollar on Thursday, weakening by 11 centavos from P56.85 previously.

“As such this hike may end up being a one-off but that will depend on two things. The first is what happens to the exchange rate. Another rise in US yields and more pressure on the currency could prompt another hike. The second is the release of the upcoming inflation and Q3 GDP numbers,” he said. 

However, he said the BSP may refrain from further tightening as economic growth, which likely remained weak in the third quarter.

“Tight fiscal policy, the current high level of rice and fuel prices, and a likely weakening of global demand will continue to drag on activity in the near term,” Mr. Tandon said. 

“As a result, we think policy makers will tread with caution, unless signs emerge of a further step-up in inflation pressure. The currency will remain a focus of concern, but the central bank has other options to manage it in a sizable stock of foreign-currency reserves,” he added.

Meanwhile, Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said the rate hike was “unnecessary” as inflation shocks have “reversed and are stabilizing.”

He noted that there is no evidence of second-round effects amid the ongoing slowdown in core inflation, which eased to 5.9% in September from 6.1% in August.

“We’re sticking to our view that the Board will hold at its scheduled rate meetings in November and December, a call that will only be bolstered if we’re right about a likely disappointing third-quarter GDP print and about the Fed holding fire for the rest of the year,” Mr. Chanco said.

He also sees the Philippines’ key rate at 5.5% by end of 2024, which implies a cut worth 100 bps from the Monetary Board, “which could start as early as the February meeting.”

After the Nov. 16 meeting, the BSP will next meet on Dec. 14 to discuss policy. — By Keisha B. Ta-asan, Reporter