Interest rates hiked again as BSP battles inflation

The cost of borrowing money for both businesses and employers as well as consumers in the Philippines will rise further as the Monetary Board (MB) again raised the Bangko Sentral ng Pilipinas (BSP) key policy rate, although at a slower place this time by 0.5 percentage point to 5.5 percent.

BSP Governor Felipe Medalla said in a press briefing the MB arrived at such a decision after noting the further uptick in headline inflation and the sharp rise in core inflation in November amid pent-up demand.

“Moreover, upside risks continue to dominate the inflation outlook up to 2023 while remaining broadly balanced in 2024,” Medalla said.

The decision was announced 12 hours after the United States Federal Reserve said it raised the US federal funds rate by as much to a range of 4.25 percent to 4.5 percent.

Also, the BSP’s interest rates on the overnight deposit and lending facilities will be set at 5.0 percent and 6.0 percent, respectively.

“The BSP’s latest baseline forecasts show that average inflation is still projected to breach the upper end of the 2 percent to 4 percent target range for 2022 and 2023 at 5.8 percent and 4.5 percent, respectively,” Medalla said.

Easing oil prices

“However, the forecast for 2024 fell to 2.8 percent owing mainly to the further easing in oil prices, peso appreciation, and the slightly lower domestic growth outlook resulting in part from the BSP’s cumulative policy rate adjustments,” he added.

Still, the BSP chief said that inflation might be higher than forecast over the next two years because international food prices are elevated due to high fertilizer prices and supply chain constraints.

Similarly, there are domestic pressures that could push inflation upward, such as trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare hikes, as well as potential wage adjustments in 2023.

Heading back down?

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

“Amid broad-based inflation pressures, persistent upside risks to inflation, and elevated inflation expectations, the MB deems it necessary to take aggressive monetary action to bring headline inflation back to within target as soon as possible,” Medalla said.

“At the same time, an adjustment in the policy interest rate will continue to provide a cushion against external spillovers amid tighter global financial conditions,” he added.

When asked whether the BSP policy rate would continue to rise in 2023, Medalla said it was “hard to say” if it would go higher than 6 percent.

“If I were to bet my money, I would say that [the policy rate’s peak] will be what we have now [5.5 percent],” he said. “But I would not rule out the possibility” that there will be more hikes next year.

Nicholas Mapa, senior economist at ING Bank, said more rate hikes were likely in 2023 but there was also a possibility of rate cuts in the second semester next year.

The Dutch banking giant said in a commentary they expect the BSP’s policy rate to be raised to as high as 6.25 percent or by an additional 0.75 ppt.

Meanwhile, Goldman Sachs said BSP signals point to a slower rate of policy rate hikes in the future.