MANILA – In an off-cycle move on Thursday, the Bangko Sentral ng Pilipinas' (BSP) Monetary Board raised policy rates by another 25 basis points amid expectations that inflation will continue to be above target until the first half of 2024.
"At its regular meeting earlier today, the Monetary Board decided to take off-cycle action to raise the BSP’s target reverse repurchase (RRP) rate by 25 basis points to 6.50 percent, effective tomorrow, Oct. 27, 2023," BSP Governor Eli Remolona Jr. said at a press briefing.
Following the hike, interest rates on the overnight deposit and lending facilities will be set to 6 percent and 7 percent, respectively.
"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. The latest baseline projections point to an elevated inflation path over the policy horizon as upside risks continue to manifest," he said.
Since May last year, the BSP has so far hiked policy rates by a total of 450 basis points in a bid to bring inflation back within the target range.
Remolona said the BSP expects headline inflation to remain elevated until the first half of next year and go down to within the government's 2 to 4 percent target range by the third quarter of 2024.
"I think beyond July, it will head back towards the middle of the target range or somewhere around 3 percent and will stay around that region for the rest of 2024," he said.
Headline inflation picked up to 6.1 percent in September.
Remolona admitted that personally, he thinks the Monetary Board should have adjusted rates sooner.
"I think we fell a little bit behind. That's the reason for this effort to catch up. I don't know if the rest of the Monetary Board agrees with that. We didn't look closely enough at expectations," he said.
Remolona said they are worried about the results of the household expectation survey which showed that about 92 percent of consumers think that inflation will be above 4 percent in the next 12 months.
"It's similar for expectations by firms. That's very worrisome to us because as you know, monetary policy cannot control supply side price shocks. But it can serve to break the link between those supply side shocks and expectations and also the link between those supply side shocks and second round effects, including for example transportation fare hikes and minimum wage increases. So that's what we worry about. That's what we focus on," he said.
Remolona said the balance of risks to the inflation outlook still leans 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 also did not rule out the possibility of another rate hike once the Monetary Board meets on Nov. 16.
"We will consider it if things are worse than we thought. We're hoping that the data are nicer to us but if not, we will have to consider a further rate hike," Remolona said.
The October 2023 headline inflation data will be released early next month ahead of the Monetary Board's meeting.
Remolona said the Monetary Board will closely monitor the impact of the increase in interest rates as this work its way through the economy.
"The tightening, as far as we can tell, has not really affected growth prospects. GDP (gross domestic product) growth seems to be slowing down because of pent-up demand waning," he said.
The BSP projects the Philippine economy to grow by 4.5 percent in the third quarter of the year, slightly higher than the 4.3 percent expansion in the second quarter. (PNA)