The Monetary Board (MB) again raised the Bangko Sentral ng Pilipinas (BSP) key policy rate—or the interest rate on money that the central bank borrows from banks—by 25 basis points (bps) to 2.5 percent.
This affirms recent signals from the MB that the BSP is going for a gradual pace of monetary policy tightening, unlike major central banks such as the United States Federal Reserve.
The US Fed has raised their key interest rate by a total of 125 basis points in two recent policy meetings, more than double the pace of the BSP.
The MB’s latest move was a repeat of the 25-bp hike last May, in recognition that the inflation outlook for this year and for 2023 continued to be dominated by risks of inflation going faster.
With the rise in the key policy rate that takes effect on June 24, the interest rates on the overnight deposit and lending facilities were also raised by 25 bps to 2 percent and 3 percent, respectively.
MB chair and BSP Governor Benjamin Diokno said in a briefing that upward pressure on inflation was coming from the potential impact of higher global prices of nonoil commodities, the continued shortage in domestic fish supply, as well as pending petitions for transport fare hikes due to elevated oil prices.
“Meanwhile, the impact of a weaker-than-expected global [economic] recovery and the possible reimposition of local COVID-19 restrictions amid an uptick in infections continue to be the main downside risks to the outlook,” Diokno said.
He said the BSP’s latest baseline forecasts have shifted higher. The average inflation is now projected to breach the upper end of the 2 percent to 4 percent target range at 5 percent in 2022 and at 4.2 percent in 2023.
Also, average inflation is still expected to subsequently decline, settling at 3.3 percent in 2024.
“Given these considerations, the [MB] believes that a follow-through increase in the policy rate enables the BSP to withdraw its stimulus measures while safeguarding macroeconomic stability amid rising global commodity prices and strong external headwinds to domestic economic growth,” Diokno said.
Commenting on the MB’s latest move, Rizal Commercial Banking Corp. chief economist Michael Ricafort said that relatively dovish signals from the BSP partly weighed on the Philippine peso.
The local currency on Thursday yet again reached a new near-17-year low, closing at 54.70 against the US dollar.
The peso has lost 1.70 against the dollar in just nine trading days since it hit the 53:$1 level last June 10.
Ricafort said there was a need to maintain a “healthy interest rate differential” between the BSP and the US Fed, in view of the differences in credit ratings.
The US government enjoys the highest credit rating of AAA while the Philippines’ sovereign credit ratings are at one to three notches above the minimum investment grade.
BSP Deputy Governor Francisco Dakila Jr. said the central bank assumes that the peso will average at 51.98:$1 this year, which is just about at the midpoint between the forecast range of 51-53 for every dollar.