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50-bps rate hike seen to dent 2023, 2024 growth

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THE Monetary Board’s decision to raise the country’s benchmark rates by 50 basis points (bps) on Thursday would likely have an impact on the country’s growth rate in the next two years.

The Monetary Board decided to raise the BSP’s overnight reverse repurchase facility by 50 basis points to 5.5 percent, effective 16 December 2022. Accordingly, the interest rates on the overnight deposit and lending facilities will be set to 5 percent and 6 percent, respectively.

Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the impact of the recent interest rate hike would be 19 bps in 2024 or a reduction of a percentage point from GDP growth. In 2023, the impact would be less at 7 bps or less than a percentage-point reduction due to the lag time in the impact of the rate hike on growth.

“Ang aming tingin, mas importante sa mga tao mapababa yung inflation. Mas masasaktan ang mga tao ng mataas na inflation kesa masasaktan sila sa pagbagsak ng GDP growth rate natin [In our view, it’s more important for Filipinos to bring down inflation. High inflation will hurt people more than low GDP growth],” Medalla said in a briefing.

Medalla said it is possible that inflation will peak in December 2022 rather than the November 2022 they earlier predicted. Inflation in November rose to 8 percent with core inflation increasing to 6.5 percent.

But, he said, the reasons for higher inflation in November was largely due to the typhoons which affected the supply of vegetables, fish, and seafood prices, among others.

The BSP Governor, however, stated that it remains impossible to be sure of the increase in prices or if there will be any more spikes in the near-term. He said, however, this indicates that raising policy rates is still not off the table but as to the rate, it was difficult to say by how much.

“You can say the worst is over. But clearly, you have to be very vigilant,” Medalla said. “What’s most important for us is as much as possible [that] the inflation rate will be below 4 percent by the third quarter next year,” he added, speaking partly in Filipino.

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

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.

The Monetary Board arrived at its decision after noting the further uptick in headline 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.

The expected upside risks to inflation over the policy horizon stem mainly from elevated international food prices due to high fertilizer prices and supply chain constraints.

On the domestic front, 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 could push inflation upwards.

Meanwhile, the impact of a weaker-than-expected global economic recovery continues to be the primary downside risk to the outlook.

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

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.

The BSP remains steadfast in its commitment to its primary mandate of sustaining price and financial stability and stands ready to take all necessary action to bring inflation to within the 2-4 percent government target band over the medium term.

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