As expected, Monetary Board raises key policy rate to 6.25%

MANILA  -As expected, the Monetary Board (MB) raised the Bangko Sentral ng Pilipinas’ (BSP) key policy rate by 0.25 percentage point (ppt) or 25 basis points to 6.25 percent effective on March 24 as inflation remained high in February.

Also, the interest rate on the overnight deposit was raised by as much to 5.75 percent as was the rate on overnight lending to 6.75 percent.

Asked whether this was the last hike in the current monetary policy tightening cycle, MB chair and BSP Governor Felipe Medalla said in a press briefing decisions in upcoming meetings will depend on data that would come in.

“It would really depend on our assessment of the inflation picture in the Philippines,” Medalla said.

He said the MB’s latest decision, similarly, was based on new information and its assessment of the effects of past policy actions—all of which “warranted a continuation of monetary tightening to anchor inflation expectations.”

Overall inflation declined slightly to 8.6 percent from 8.7 percent in January. However, core inflation, which excludes prices of goods and services that are considered volatile like food and energy, ratcheted up to a 23-year high of 7.8 percent from 7.4 percent.

Considering that, Medalla said further monetary policy action was deemed necessary to address broadening price pressures coming from robust domestic demand and lingering supply-side constraints.

Further, the BSP revised downward their forecast for average inflation in 2023 to 6 percent from the 6.1 percent estimated last month, and for 2024 to 2.9 percent from 3.1 percent.

The regulator said the inflation forecasts reflect the cumulative impact of policy rate hikes—now at a total of 4.25 ppt or 425 basis points from a record low of 2 percent—and the slower growth outlook for both here and abroad.

And while the BSP revised downward its inflation forecasts, private-sector analysts’ expectations have risen slightly for this year and for 2024 and 2025 remain near 4 percent or the upper end of the target band.

Lingering concerns

Even the BSP admits that actual inflation this year and next might turn out higher than its forecasts.

This is due to continuing concerns about the effect of supply shortages on domestic food prices as well as the potential impact of higher transport fares, increasing electricity rates and above-average wage adjustments this year.

These appear to outweigh the effect of a weaker-than-expected global economic recovery, which could help bring down inflation.

Miguel Chanco, chief economist on emerging Asian markets at Pantheon Macroeconomics, said the latest policy rate hike “should be the last.”

“Favorable base effects from last year’s price surge will take hold from this month [onward], and we maintain that it’s only a matter of time before the Philippines starts to import the deflation in global food prices,” Chanco said.

“The [Monetary] Board’s next move is likely to be a rate cut, to the tune of 50 basis points, albeit only as early as the fourth quarter, when we expect inflation to return comfortably within the [BSP’s] 2 percent to 4 percent target range,” he added.

Hence, the United Kingdom-based think tank expects the BSP policy rate to end 2023 at 5.75 percent.

Michael Ricafort, chief economist at the Rizal Commercial Banking Corp., said BSP policy movements would still largely be corollary to future [United States Federal Reserve] rate hikes aside from the local inflation trend and the behavior of the peso exchange rate.

“For the coming months, local policy rates could still, at the very least, match any future Fed rate hikes after recent Fed signals and market expectations of another possible 0.25-ppt Fed rate hike or pause on the next [US] rate-setting meeting on May 3,” Ricafort said.

“As a result, any additional Fed rate hike…could be, at least, matched locally on the next local rate-setting meetings on May 18, to maintain a more comfortable interest rate differential that helps stabilize the peso exchange rate and overall inflation,” he added.

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