BSP signals more policy tightening after US Fed rate hike

The Bangko Sentral ng Pilipinas (BSP) on Thursday said it will continue its monetary policy tightening cycle to keep inflation in check after the US central bank delivered a huge interest rate hike.

“Further monetary policy adjustment will be carried out in the coming months commensurate with the primary objective of preventing inflation from becoming further entrenched,” BSP Governor Felipe Medalla said in a statement.

Medalla issued the statement after the US Federal Reserve hiked its key policy rate by 75 basis points to help tame inflation.

Monetary policy or interest rates are among the tools used by central banks to stabilize inflation through controlling money supply by raising borrowing costs.

Higher borrowing costs could make consumers and businesses spend less, therefore reducing economic activity or lowering demand and eventually lowering prices.

READ: Higher policy rates: How are you affected?

This month, the BSP delivered a hawkish 75 basis points increase in key policy rates, bringing the overnight reverse repurchase facility to 3.25%, overnight deposit facility at 2.75%, and overnight lending facility at 3.75%.

The latest hikes bring the policy rates back to their pre-pandemic levels, or those seen in February 2020.

This is also the most aggressive rate hike of the BSP so far since the interest rate corridor was implemented in June 2016, and the first off-cycle adjustment since April 2020.

The Philippine central bank raised interest rates after inflation—the rate of increase in the prices of goods and services— quickened to 6.1% in June from 5.4% in May and the downwardly revised 3.7% in June 2021.

This is also the fastest inflation print since the 6.9% recorded in October 2018 and the same reading seen in November 2018.

On the US Fed rate hike, Medalla said the BSP is “prepared to utilize the full force of available measures” to “address the potential risks to Philippine inflation and inflation expectations arising from an overshooting or excessive depreciation of the Philippine peso.”

“The BSP believes the Philippines’ robust economic prospects continue to provide enough room for further tightening of the monetary policy stance. As always, the BSP’s future monetary policy decisions will remain guided by data outcomes for the Philippine economy,” Medalla said.

In an emailed commentary, Rizal Commercial Banking Corp. chief economist Michael Ricafort said that “for the coming months, more local policy rate hikes are still possible, if needed, as a function of any further Fed rate hikes in the quest to bring down elevated US inflation.”

“This would also help better manage/anchor both actual inflation and inflation expectations,” Ricafort said.—AOL, GMA News