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BSP delivers jumbo rate hike anew

The Philippine central bank raised its 2022 average inflation forecast to 5.8%, from 5.4% previously. — PHILIPPINE STAR/ EDD GUMBAN

By Keisha B. Ta-asan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) on Thursday raised its key interest rate for a sixth time this year to tame inflation, which it now sees rising to 5.8% by yearend. 

As telegraphed by BSP Governor Felipe M. Medalla earlier this month, the Monetary Board increased the overnight reverse repurchase rate by 75 basis points (bps) to 5%, the highest in nearly 14 years.

The move followed the 75-bp hike by the US Federal Reserve at its Nov. 1-2 meeting, which brought the policy rate to 3.75-4%.

The BSP’s rates on the overnight deposit and lending facilities were also increased to 4.5% and 5.5%, respectively.

“In deciding to raise the policy interest rate anew, 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,” Mr. Medalla said.   

Headline inflation accelerated to a near 14-year high of 7.7% in October, from 6.9% in September and 4% a year earlier.

Core inflation, which discounts food and fuel prices, quickened to 5.9% in October from the revised 5% in September.

The BSP also raised its average inflation forecast for this year to 5.8%, from 5.4% . For next year, the BSP hiked the inflation forecast to 4.3% from 4.1%. These projections are still above the central bank’s 2%-4% target. 

The 2024 inflation forecast was also raised to 3.1% from 3%.

“Risks to the inflation outlook lean strongly toward the upside until 2023 while remaining broadly balanced in 2024. Upside risks are associated with elevated international food prices owing to higher fertilizer costs, trade restrictions and adverse weather conditions,” Mr. Medalla said.

He also cited supply disruptions, agricultural damage due to typhoons and possible transport fare hikes as factors that could fuel inflation.

BSP Department of Economic Research Director Dennis D. Lapid said inflation is expected to average 5.8% this year as inflation peaks in the fourth quarter.   

However, Mr. Medalla said he does not see inflation breaching 8% in November or December.

“Even if it does, it will start going down by next year. Our own forecast is that by the second half of next year, inflation will actually be closer to 3% than to 4%, of course that’s assuming that there are no new supply shocks,” he said.

Mr. Medalla said the Monetary Board saw the need for aggressive tightening to “safeguard price stability,” amid the possibility of further second-round effects, persistent inflationary pressures and upside risks to the inflation outlook.

“With the strong growth of the economy in the third quarter of 2022, domestic demand is seen to hold firm owing to improved employment outturns, investment activity and consumer spending,” he said.

The Philippine economy expanded by 7.6% in the third quarter, bringing the year-to-date average growth to 7.7%. Economic managers expect full-year GDP growth to settle within 6.5-7.5%.

“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,” Mr. Medalla said.   

After the BSP’s announcement, the Philippine peso closed at P57.36 versus the US dollar, barely changed from its P57.35 finish on Wednesday. Year to date, the peso has weakened by P6.36 or 11.1% from its P51 close on Dec. 31, 2021. 

Asked if the BSP would continue to mirror the Fed’s tightening in the coming months, Mr. Medalla said future policy actions would be data-dependent.

“The Fed rate now is not the highest, but the four 75-bp [rate increases] have been the [fastest] for a long time and I think that’s over. Therefore, we are slowly going back to a more normal global interest rate environment,” he said.   

“We will probably do less of the two recent unusual actions the BSP did, namely the off-cycle 75 (bps) and this 75 (bps) that was announced two weeks earlier,” he added.   

The central bank has raised rates by a total of 300 bps this year.   

Following the policy announcement, economists are expecting one more rate hike at the Monetary Board’s Dec. 17 meeting.

“Given lingering inflationary pressures, we expect another 50 bps from the BSP in December, to match the move by the Fed. Stronger-than-expected Q3 GDP figure also gives the BSP some comfort in its position that the economy is resilient enough to weather policy tightening,” Oxford Economics Assistant Economist Makoto Tsuchiya said in a note.   

However, Mr. Tsuchiya said a looming recession in developed countries, high inflation, tightening global financial condition and a China slowdown cloud the outlook for the Philippines.

“BSP will likely retain its hawkish tone given its recent adjustment to inflation forecasts for both 2022 and 2023,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said, adding that he also expects a 50-bp hike in December.

Gareth Leather, senior Asia economist at Capital Economics, said the BSP might stop hiking rates in early 2023.

“We think further tightening is likely in the near term, but with inflation having probably peaked, headwinds to the recovery mounting and the Fed’s own tightening cycle are likely to come to an end soon,” Mr. Leather said in a note.

He said the further weakness in the peso would likely be over in the next few months, and he expects the peso to appreciate against the US dollar by the second half of 2023.

“Overall, we are expecting one further 50-bp rate increase at the BSP’s final meeting of the year in December, followed by another hike in early 2023, which should mark the end of the central bank’s tightening cycle,” he added.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said the BSP should be cautious in its inflation assessment and monetary tightening.

“Any further rate increase from these levels would be tantamount to overkill, not least because the road to target-range inflation by the middle of next year remains clear. We vehemently disagree with the board’s assessment that the recent rise in core inflation is worth paying attention to, as the Philippines’ gauge of underlying inflation still includes some volatile food and energy-related components,” he said.

“All told, we are sticking to our call that a partial unwinding of this year’s rate hikes will be pursued towards the back end of 2023.”