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Tuesday, April 16, 2024

Monetary Board deals 50-bps rate hike; more in future

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WITH the higher-than-expected inflation in January and the recovery of consumption spending, the Bangko Sentral ng Pilipinas (BSP) said it is possible for monetary authorities to further raise interest rates in the Monetary Board’s succeeding meetings.

On Thursday, the MB increased the BSP’s overnight reverse repurchase facility by 50 basis points to 6 percent, effective February 17, 2023, a move that was widely expected.

The BSP said the interest rates on the overnight deposit and lending facilities will be set to 5.5 percent and 6.5 percent, respectively.

“Yes, anything is possible [additional rate hikes]. The least likely scenario is a no increase in the next meeting. We cannot rule out anything but if I were to say which is the least likely scenario, it’s zero in the next meeting. Of course if a negative

shock happens, reversing all of this, then I might be wrong,” BSP Governor Felipe Medalla said.

Medalla said in the succeeding months, jumbo rate hikes and zero rate hikes may be taken out of the table. But if the Federal Reserve decides to increase rates by 75 basis points, the BSP may raise rates by the same magnitude.

“The need for extraordinarily high interest rate increases like 75 was largely because the inflation was also coming with a very weak and rapidly depreciating peso. I think there was a time, a very short period, when the peso depreciated by 14 percent. So unless there’s a large change in monetary policy rate somewhere else, I think we have done enough 75s,” Medalla explained.

Highest since 2008

With the latest increase in policy rates, interest rates are now the highest since August 2008 when it increased to 6 percent from 5.75 percent. In July 2007, interest rates were also at 6 percent, but this was a decrease from 7.5 percent.

Based on BSP estimates, there is already a 96.7 percent chance that inflation would be above 4 percent this year. Inflation is expected to average 5.4 percent in the third quarter and 3.8 percent in the fourth quarter.

The BSP now expects inflation to average 6.1 percent this year before slowing to 3.1 percent. However, it said it will endeavor to attain the 2 to 4 percent inflation target of the administration in the medium term.

“The main scenario is, in fact I started out with two 25s, now clearly that is wrong because 50 na kaagad yung una eh, so in short, it’s hard to rule out a third after this one or maybe even a fourth. But that will depend,” Medalla said.

The BSP, in a statement, said the forecasts were adjusted upward due to higher-than-expected inflation in January 2023 as well as the rebound in consumer spending.

Further, BSP said, headline and core inflation measures have continued to increase. This indicated a “broadening of price pressures” in the economy.

“At the same time, the balance of risks to inflation now leans toward the upside for both 2023 and 2024, with pressures emanating from 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 in 2023,” the BSP said in a statement.

The Monetary Board reiterated its position that the country needs timely and more aggressive whole-of-government actions to mitigate the impact of persistent supply-side pressures on food prices, including trade-positive measures and significant progress to boost productivity.

Image credits: Patrick Roque via Wikimedia Commons CC BY-SA 4.0

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