BSP hikes rates for 1st time since 2018

A vendor arranges vegetables at a public market in Manila. — PHILIPPINE STAR/ RUSSEL A. PALMA

THE Bangko Sentral ng Pilipinas (BSP) raised its key interest rate for the first time since 2018 to tame rising inflation.

The Monetary Board on Thursday increased the benchmark rate by 25 basis points (bps) to 2.25%, as expected by eight out of 17 analysts in a BusinessWorld poll last week.

Interest rates on the overnight deposit and lending facilities were also hiked by 25 bps to 1.75% and 2.75%, respectively.

“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,” BSP Governor Benjamin E. Diokno said at a media briefing.

“Persistent inflationary pressures point to the need for prompt monetary action to anchor inflation expectations.”

Inflation climbed to 4.9% in April, the highest in more than three years, as oil and commodity prices soared amid the Russia-Ukraine war and supply chain disruptions.

“The Monetary Board also observed the emergence of second-round effects, including the higher-than-expected adjustment in minimum wages in some regions. Inflation expectations have likewise risen, highlighting the risk posed by sustained pressures on future wage and price outcomes,” he said.

Mr. Diokno said the strong rebound in economic activity and jobs market in the first quarter “provide scope for the BSP to continue rolling back its pandemic-induced interventions.”

He said the National Government will fully settle on Friday the P300-billion zero-interest loan it secured from the BSP, ahead of the original maturity date on June 11.

The Monetary Board will also reset the BSP’s bond-buying window into a regular liquidity facility that will also ensure the sustainability of its balance sheet. Mr. Diokno said the BSP held around 40% of government bonds at the height of the pandemic, but has been significantly reduced to around 2-3%.

“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,” he said.

The BSP chief said the pace and timing of further monetary policy action will be “guided by data outcomes.”

The start of the BSP’s tightening cycle came a week after the release of data showing gross domestic product (GDP) expanded by a better-than-expected 8.3% in the first quarter.

RISING INFLATION
At the same time, the BSP upwardly revised its average inflation forecast for 2022 to 4.6% from the previous forecast of 4.3%, exceeding the 2%-4% target band. For 2023, the BSP’s inflation forecast was hiked to 3.9% from 3.6% previously.

BSP Department of Economic Research Managing Director Zeno Ronald R. Abenoja said the central bank’s new inflation projections factored in higher oil and non-oil prices caused by the Russia-Ukraine war.

The BSP now expects the price of Dubai crude to average about $100 per barrel this year from the $83-per-barrel projection given earlier.

Mr. Abenoja said the faster-than-expected growth, quicker inflation, the increase in the minimum wage in Metro Manila, and the impact of the policy tightening by the US Federal Reserve were also considered in the new inflation estimates.

“Inflation could likely exceed 5% in the next few months,” Mr. Diokno said, with the peak expected within the second quarter.

“However, barring any further adverse shocks, we also expect inflation to slow down heading closer eventually towards 2023 and revert to within the target band by the middle of that year as the effects of the global commodity price shocks dissipate,” he added.

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said he now expects the BSP to raise rates by at least 100 bps this year, from 75 bps previously.

“Despite this, we believe the economy has enough cushion in case the BSP decides to hike its policy rate further. Even with a 100-bp rate hike this year, the policy rate will still be below historical and pre-pandemic levels. Furthermore, the impact of rate hikes is usually gradual and the economy has the capacity to absorb slightly higher interest rates especially now that demand is almost back to pre-pandemic level,” he said in a note.

However, the more significant risks to the economic outlook are inflation and the peso depreciation against the US dollar, Mr. Neri said.

For MUFG Bank analyst Sophia Ng, inflation may peak at 5.5% in June as inflation risks become more broad-based. She said the BSP may now be more “aggressive” in carrying out its exit strategy, noting how officials have become more hawkish in their statement.

“A total of 100 bps hikes in 2022 will still not be able to fully unwind the cumulative 200 bps cut done in 2020,” Ms. Ng said in a note.

The BSP will have its next policy review on June 23. — Luz Wendy T. Noble