BSP delivers off-cycle 25bps rate hike

The Bangko Sentral ng Pilipinas (BSP) snapped its six-month policy tightening pause as it decided to hike the policy rate after an off-cycle meeting on Thursday in a bid to stem rising inflation.

At a press briefing, BSP Governor Eli Remolona said the policy-setting Monetary Board raised the target reverse repurchase (RRP) rate by 25 basis points to 6.50%, effective October 27, 2023.

Consequently, the interest rates on the overnight deposit and lending facilities will be raised to 6% and 7%, respectively.

This is an off-cycle monetary policy action, as the Monetary Board was originally scheduled to meet on November 17, 2023, to decide on key policy rates.

This is the first time since April that monetary authorities have adjusted policy rates.

The Monetary Board last kept rates unchanged in September at 6.25% for the target reverse repurchase (RRP), the overnight deposit facility rate at 5.75%, and the overnight lending facility rate at 6.75%.

“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,” Remolona said.

“The latest baseline projections point to an elevated inflation path over the policy horizon as upside risks continue to manifest. Before today's monetary policy action, the staff risk-adjusted forecast for 2024 was 4.7%, up from 4.3% previously,” the central bank chief said.

The latest BSP inflation forecast is well above the government’s target range of 2% to 4%.

On Tuesday, Remolona hinted at an off-cycle rate hike as inflation expectations for 2023 had been raised to 5.8% from the previous forecast of 5.3% and to 3.5% from 3.3% for 2024.

The two straight months of inflation rate acceleration seen in August and September also added to pressures to again tighten monetary policy.

Inflation, which measures the rate of increase in prices of consumer goods and services, grew faster at 6.1% in September from 5.3% in August as food and transport costs weighed on prices amid domestic and external supply challenges.

Remolona said that 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. 

“Meanwhile, the effect of a weaker-than-expected global recovery as well as government measures to mitigate the effects of El Niño weather conditions could temper inflationary impulses,” the BSP chief said.

“On the output side, recent domestic indicators point to dissipating pent-up demand in the near term. Nevertheless, the country's medium-term growth prospects remain largely intact,” he said.

The Monetary Board, the central bank chief said, is closely monitoring the impact of the increase in interest rates as they work their way through the economy. 

“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,” Remolona said.

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

Since May last year, the Monetary Board has raised interest rates by a total of 425 basis points. —VBL, GMA Integrated News