BSP raises key rate by 0.5 ppt to 6%

Households and businesses that borrow from banks will need to think harder about getting new loans as the cost of money is primed to go even steeper in the months ahead after the Monetary Board (MB) again raised the policy rate by 0.5 percentage point (ppt) to 6 percent from 5.5 percent, effective Feb. 17.

This dashed hopes that the key interest rate of the Bangko Sentral ng Pilipinas (BSP) will soon stop rising and possibly even decrease in the second semester this year.

The BSP policy rate last reached 6 percent in August 2008 and remained at that level until November that year.

BSP Governor Felipe Medalla said in a media briefing on Feb. 16 that “it is unlikely that we will not increase” the policy rate yet again in the MB’s next meeting in five weeks or on March 23, and possibly in succeeding meetings.

Medalla earlier expressed belief that there may be only two more rate hikes this year, twice at 0.25 ppt in February and March, which would lead to a pause and eventual rate cuts.

“Obviously, that’s no longer on the table since we already started with 50 basis points [0.5 ppt],” he said.

He reiterated his personal view that, in later meetings, the MB will neither go for zero—no increase—nor a 0.75-ppt hike “unless the [United States] Federal Reserve does so.”

In deciding on the latest rate increase, the MB said it took into consideration the latest baseline inflation forecast path that “shifted higher relative to the previous assessment.”

Target range

In the previous meeting last November, the BSP’s forecast was that the full-year average inflation for 2023 will be closer to the target range of 2 percent to 4 percent, from 5.8 percent in 2022.

Now , the BSP expects the full-year readout to exceed the target at a much greater degree, at 6.1 percent.Meanwhile, the BSP continues to expect that full-year inflation will be within the target range at 3.1 percent in 2024.

However, the MB said the likelihood that actual inflation would differ from the forecast “now leans toward the upside for both 2023 and 2024.”

This was attributed to the potential impact of global food market uncertainties, continued domestic shortages in key food items, additional transport fare hikes amid elevated oil prices, and the higher-than-expected wage adjustments this year.

These factors overwhelm the likelihood that inflation in 2023 would turn out to be lower than forecast, if global economic recovery were to be weaker than expected.

“Given these considerations, the Monetary Board deems a strong follow-through monetary policy response as necessary to reduce the risk of a breach in the inflation target in 2024,” the BSP governing body said.

“An upward adjustment in the policy interest rate would also prevent inflation expectations from drifting further away from the target band,” it added.

Further, the MB said that with the growth in gross domestic product in 2022 exceeding expectations, raising the monetary policy rate could help dampen potential upward pressure on prices from robust demand for goods and services as well as from so-called second-round effects like increased wages.

Meanwhile, the lagged impact of tighter monetary policy—that is, higher policy rates—made earlier is now beginning to be felt more strongly.

Just last moth, the MB raised the caps on credit card transactions by increasing the maximum interest rate or finance charge imposed on a cardholder’s unpaid outstanding credit card balance by one percentage point from 2 percent to 3 percent per month. This translates to a 12-ppt yearly rise from 24 percent to 36 percent.

The BSP said the increase in the interest rate ceiling for credit card transactions was due to the upward trend in domestic interest rates on account of high inflation and BSP’s efforts to counter the same through successive policy rate hikes.