MB HIKES INTEREST RATES BY 75 BPS

THE Monetary Board (MB) on Thursday raised key interest rates by three quarters of a percent, noting continuing upside inflation risks and the need to support the peso.

“The Monetary Board decided to raise the interest rate on the BSP’s (Bangko Sentral ng Pilipinas) overnight reverse repurchase facility by 75 basis points (bps) to 5.0 percent effective tomorrow, 18 November 2022,” central bank Governor Felipe Medalla said in a press briefing following the MB meeting.

“Accordingly, the interest rates on the overnight deposit and lending facilities will be set to 4.5 percent and 5.5 percent, respectively,” he added.

The announcement came as no surprise as Medalla had telegraphed the move after the US Federal Reserve (Fed) ordered another massive 75 bps increase on November 2.

On Thursday, the BSP chief said the central bank’s latest baseline forecasts indicated a higher inflation path over the policy horizon, with fullyear inflation breaching the 2.0- to 4.0-percent target at 5.8 percent this year and 4.3 percent in 2023.

“The forecast for 2024 has also risen slightly to 3.1 percent,” the central bank said in a statement.

“In deciding to raise the policy interest rate anew, the Monetary Board noted that core inflation had risen sharply in October, indicating stronger pass-through of elevated food and energy prices, as well as demandside impulses on inflation,” Medalla said.

“At the same time, the risks to the inflation outlook lean strongly toward the upside

until 2023 while remaining broadly balanced in 2024. Upside risks are associated with elevated international food prices owing to higher fertilizer costs, trade restrictions and adverse weather conditions,” he added.

Inflation reached a 14-year high of 7.7 percent in October. Officials earlier said that this year’s peak would be hit that month but now expect inflation to go higher before the year ends.

On the domestic front, the BSP governor said the impact of weather disturbances on fruit and vegetables prices, supply disruptions in key food items, such as sugar and meat, and pending fare hike petitions could also exert upward pressure on inflation.

The impact of a weakerthan-expected global economic recovery continues to be the main downside risk to the outlook.

“Given the increased likelihood of further secondround effects, persistent inflationary pressures and the predominance of upside risks to the inflation outlook, the Monetary Board recognized the need for aggressive monetary policy action to safeguard price stability,” Medalla said.

With strong economic growth in the third quarter, however, the BSP expects domestic demand to hold firm.

“[A] sizeable adjustment in the policy interest rate will help insulate the economy from external headwinds and exchange rate fluctuations that could further entrench price pressures and potentially dislodge inflation expectations,” Medalla said.

The Monetary Board will continue to push for nonmonetary government interventions to mitigate the impact of persistent supply side pressures on commodity prices, including those aimed at alleviating supply shortages and strengthening farm productivity.

“Looking ahead, the BSP will continue to take all necessary action to bring inflation back within the target band over the medium term, in keeping with its primary mandate to sustain price and financial stability,” he added.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said rate hikes would likely continue “especially if inflation remains high to help stabilize the peso and overall inflation.”

Similarly, China Banking Corp. chief economist Domini Velasquez said the central bank would remain aggressive to address rising inflation.

“[I]t is inevitable that the BSP will keep its 100-bpinterest rate differential with the Fed. An elevated inflation outlook in 2023, set to be the third year in a row [using 2012 prices for 2021] that inflation will breach the BSP’s four-percent target, will compel the central bank to keep interest rates high throughout most of 2023,” Velasquez noted.

“A possible cut might only come in fourth quarter as inflation falls within target in the latter half of the year.”

EIREENE JAIREE GOMEZ