BSP chief says latest rate hike necessary to fight inflation

MANILA— The Bangko Sentral ng Pilipinas reiterated on Friday that it was necessary to inject a jumbo rate increase or else risk fanning inflation expectations.

This was the explanation of BSP Governor Felipe Medalla, a day after the central bank unleashed a 50- basis point hike on its key policy rate. Banks and financial institutions use the interest rate as benchmark for borrowing out loans.

“Raise by too much – which is easy to correct – or raise by too little & run the risk of inflationary expectations being disanchored even further. The latter is harder to reverse,” he tweeted.

Interest rates currently stood at 6%. Central banks typically raise borrowing costs to rein in spending within an economy, otherwise inflation could start faster than expected, which the Philippines is facing these days.

As it is, inflation quickened 8.7% year-on-year in January. Economists, like Medalla, expected inflation to peak towards the end of the year but that has not been the case as supply chain woes, among others, persisted.

Likewise, the BSP observed the spillover effects of inflation taking hold. This meant that other cogs of the economy, such as services like rent and transport costs, were teetering to pricey levels.

Thus, the 50-bps rate hike was warranted as the BSP sees it. The Monetary Board is widely expected to hike the benchmark rate by either 25 or 50 basis points in its next meeting in March.

But more importantly, Medalla explained that Thursday’s hike was meant to convince Filipinos and the market that the central bank is serious in fighting inflation.

This is because if Filipinos anticipate that prices will remain elevated in the coming months and years — or, in the BSP’s words, if inflation expectations were “disanchored” — people might call for bigger wages. This, in turn, may force businesses to increase their selling prices from time to time to offset the costs of pay hikes, potentially creating a dangerous cycle of rapid inflation that would be harder to control.

Rate hikes typically take 12 to 18 months before it seeps into the economy. The BSP said yesterday’s 50-bps rate hike will dent economic growth by 0.04%.

Medalla emphasized that they’re expecting inflation to fall below 4% towards the final quarter of 2023.

“The @BangkoSentral‘s credibility as an inflation-targeting central bank is hard-won and we will work hard not to reverse these gains and bring inflation to within-target over the medium term” he tweeted.