BSP again raises rates by 0.5 ppt to quell stubborn inflation

The Monetary Board (MB) raised the Bangko Sentral ng Pilipinas (BSP) key policy rate by 0.5 percentage point (ppt), the second time in as many meetings and as widely expected, to 4.25 percent amid still higher inflation forecasts.

This takes effect on Sep. 23 and the interest rates on the overnight deposit and lending facilities were also raised by as much to 3.75 percent and 4.55 percent, respectively.

Since it started raising rates last May, the MB has raised the policy rate four times by a total of 2.25 ppts from an all-time low of 2 percent.

BSP Deputy Governor Francisco Dakila Jr. said at a briefing that full-year average inflation was expected again to be higher than previously forecast, now seen at 5.6 percent from 5.4 percent as projected last August.

The forecast has been rising with every successive policy meeting since tightening started, from 4.6 percent in May and 5 percent in June.

Also, the inflation forecast for 2023 has also risen. From 4 percent as projected in August, next year’s average is now expected to reach 4.1 percent and break the upper end of the target range of 2 percent to 4 percent.

With higher interest rates, consumers need more money to service loans such as those availed for buying or building houses or purchasing vehicles. This diverts funds from other consumption activities that would have been done if interest rates did not rise.

In other words, demand for these other commodities decreases because the money that would have been used to buy them would now be earmarked for servicing loans. Otherwise, the same consumers would be discouraged to buy a new home or car—which also means a decrease in demand for these big ticket items.

Second-round effects

With less money going around and demand for goods and services diminished, prices are expected to go down.

“In deciding to raise the policy rate anew, the Monetary Board noted that price pressures continue to broaden,” Dakila said.

“Moreover, second-round effects continue to manifest, with inflation expectations remaining elevated in September following the approved minimum wage and transport fare increases,” he added.

Dakila further said that inflation could turn out to be higher than forecast due to factors such as rising prices of nonoil commodities, pending petitions for further transport fare hikes, the impact of weather disturbances on prices of food items, as well as the sharp increase in the price of sugar.

On the other hand, inflation might turn out lower than forecast due to the impact of a weaker-than-expected global economic recovery.

The MB decision was announced just 13 hours after the US Federal Reserve’s own move to raise their policy rate by 0.75 ppt for the third-consecutive meeting.

And while the MB maintains that its own decisions are based on “actual data rather than the actions of other central banks” like the US Fed, the BSP was among many central banks that raised rates after the Americans did.

The Netherlands-based ING Bank said in a commentary that rising US interest rates are being “exported worldwide” through a strong US dollar, which is largely a result of the rate hikes.

Still, rising rates are not expected to deter Filipinos from taking out bank loans.

“With the economy on firmer footing, we may see credit growth moderate but not slow as the Philippine economy takes the hit from the triple threat of higher inflation, rising interest rates and high government debt on the chin, able to better withstand the fallout and maintain growth even in these challenging times,” said Nicholas Mapa, ING Bank senior Philippines economist.

Latest data from BSP show that the increase of loans extended by the country’s large banks continued at a brisk pace, pegged at 12 percent in July at the same yearly pace observed in June.

Philippine residents borrowed 12 percent more, with the biggest volumes going to the real estate activities; manufacturing; and wholesale and retail trade.

The growth of consumer loans to residents—for credit card transactions, motor vehicle purchases and for salary-based general purpose—revved up to 15 percent in July from 11 percent in June. The BSP said earlier that the sustained growth in bank lending and liquidity will support the recovery of economic activity and domestic demand.