MANILA -As its chief had hinted, the Bangko Sentral ng Pilipinas (BSP) resumed hiking its policy rate in an off-cycle decision on Thursday, with the possibility of further tightening in a bid to bring inflation back to target as price pressures continue to build.
The Monetary Board (MB) lifted the key rate by 25 basis points to 6.5 percent after what analysts called a “hawkish pause” for four straight meetings.
It was a move that BSP Governor Eli Remolona Jr. had repeatedly telegraphed to the market a few days ahead. The MB was not supposed to convene for a policy meeting until Nov. 16, but Remolona said the BSP “recognized the need for this urgent monetary action” after inflation sizzled to a four-month high of 6.1 percent in September on the back of expensive food items.
With prices still stubbornly high based on latest data, Remolona said he expects inflation to return to the BSP’s 2 to 4-percent target range only in July next year, adding that the central bank is not ruling out another rate increase at its Nov. 16 meeting “if things are worse than we thought.”
READ: PH inflation rose to 6.1% in Sept as food prices, transport cost soared
“We are hoping that the data are nicer to us. But if not, then we will have to consider a further rate hike,” he said.
The last time the BSP fired off an off-cycle rate increase was on July 14, 2022, when a peso that sank to record-lows forced monetary authorities to deliver a jumbo 75-bp hike. Including Thursday’s tightening action, the BSP has so far lifted its policy rate by a total of 450 bps, among the most aggressive in Asia.
Growth prospects ‘not affected’
Banks use the BSP’s benchmark rate as guidance when charging interest rates on loans. By making borrowing costs more expensive, the BSP wants to temper strong demand for commodities with limited supply. This, in effect, tames inflation.
But there are strong voices like Socioeconomic Planning Secretary Arsenio Balisacan who have pointed out that further rate hikes won’t work now because much of the price pressures are coming from supply problems.
READ: Further policy tightening could hurt Philippine consumers -Balisacan
Balisacan has also argued that the previous tightening moves had already done their job in reining in demand-side price pressures after core inflation, which excludes volatile consumer items, decelerated further to 5.9 percent in September from the previous month’s 6.1 percent.
Any additional tightening at this point, Balisacan said, would be damaging to an economy that already grew at its slowest pace in 12 years in the second quarter at 4.3 percent.
But Remolona believes the aggressive tightening “has not really affected growth prospects,” adding that the slowdown was mainly due to “waning” of pent-up demand that boosted consumption when the world emerged from pandemic lockdowns.
“Monetary policy cannot control supply-side shocks but it can serve to break the link between supply shocks and expectations,” the BSP boss said. “Those supply shocks and second-round effects like transpo fare hikes, that’s what we worry about.”
Miguel Chanco, economist at Pantheon Macroeconomics, disagreed.
“From our perspective, today’s surprise hike is unnecessary, considering that the main shock to inflation in recent months—the surge in rice prices—has reversed and is stabilizing, and that there still is no evidence of any second-round effects—let alone ‘additional’ ones—looking at the ongoing slowdown in core inflation and still-improving trends at the margin,” Chanco said.
Rising borrowing costs also mean more expensive debts for the Marcos administration, which has to bridge a projected budget gap of P1.5-trillion this year.
Leonardo Lanzona, economist at Ateneo de Manila University, said the rate increases may serve as “a means of disciplining” the government on its spending priorities.
“As the cost of money goes up, the government will need to be more selective with its expenditures, thus guaranteeing that the government will not contribute to the inflation caused by supply-side factors,” he said.