BSP delivers off-cycle hike to tame inflation


The Bangko Sentral ng Pilipinas (BSP) on Thursday hiked its key policy interest rates by 25 basis points to 6.5 percent to arrest the increase in the prices of goods and services.

The Monetary Board (MB), the BSP’s highest policy-making body, decided to raise the target reverse repurchase (RRR) rate by 25 basis points effective on October 27.

With the decision, the interest rates on the overnight deposit and lending facilities will be set at 6.0 percent and 7.0 percent, respectively, according to the BSP.

“The Monetary Board recognized the need for this urgent monetary action to prevent supply-side price pressures from inducing additional second-round effects and further dislodging inflation expectations,” BSP Governor Eli M. Remolona Jr. said in a press briefing.

“The latest baseline projections point to an elevated inflation path over the policy horizon as upside risks continue to manifest,” Remolona added.

Remolona cited the broadening of second-round effects of higher transportation fare and minimum wages for the need of monetary policy tightening.

“Inflation expectations have risen sharply, highlighting the risk of further second-round effects,” he said.

The country’s inflation in September accelerated to 6.1 percent from 5.3 percent in August.

Inflation path

Remolona also said the BSP is “prepared” for a “follow-through” monetary policy action if necessary “to bring inflation back to a target-consistent path” in keeping with the BSP’s price stability mandate.

“The balance of risks to the inflation outlook still leans significantly toward the upside, due mainly to the potential impact of higher transport charges, electricity rates, international oil prices, and minimum wage adjustments in areas outside the National Capital Region,” he said.

Nonetheless, Remolona noted that the impact of weaker-than-expected global economic recovery and the state’s measures to mitigate the negative impacts of El Niño would help temper “inflationary impulses.”

He also disclosed that recent domestic indicators point to “dissipating” pent-up demand in the near-term.

Remolona revealed that the BSP does not see the country’s inflation print returning to its target band of 2 percent to 4 percent this fourth quarter.

“That is no longer the case. We do not think that will happen. In fact, I think from March to July next year, the headline inflation will be very likely above 4 percent. That’s what our model says,” he said.

The earliest possible time that the country’s inflation would fall within the target range is in August 2024, Remolona said.

He also said the MB supports the proposal of Marcos Jr.’s economic managers to extend lower tariff rates on rice, pork and corn to ease inflation pressures.

“Looking ahead, the Monetary Board deems it necessary to keep monetary policy settings tighter for longer until inflationary expectations are better anchored and a sustained downward trend in inflation becomes evident,” he said.

However, the BSP governor admitted that they “fell a little bit behind” in further increasing the policy interest rates, hence the off-cycle action on Thursday.

“That’s the reason for this effort to catch up. We did not look closely enough at expectations. We have measures of expectations and one of them was very striking this time,” Remolona said.

Citing the BSP’s surveys, Remolona said about 92 percent of consumers expect that inflation would remain above 4 percent in the next 12 months, which is the same sentiment shared by firms.

“That is very worrisome for us,” he said. “Monetary policy cannot control supply side price shocks but it can serve to break the link between those supply shocks and the expectations and also the link between those supply shocks and second round effects.”

Economic growth

Furthermore, Remolona said the MB is “closely monitoring” the impact of the interest rate hikes on the country’s economic growth, saying they expect the medium-term growth prospects to remain “largely intact.”

“The Monetary Board also continues to support fiscal efforts to sustain growth through more rapid programmed spending, as well as non-monetary interventions to address persistent supply-side pressures on prices,” he said.

The BSP governor disclosed that the third quarter GDP estimate is going to be “higher” than 4.5 percent recorded in the second quarter.

“We’re watching that very closely. We don’t want tight monetary policy to negatively affect our growth prospects,” Remolona said.

Image credits: Michael Edwards |