By Keisha B. Ta-asan
THE BANGKO SENTRAL ng Pilipinas (BSP) on Thursday raised its key interest rate for a second straight meeting to cool inflation, which is now seen to quicken to 5% this year.
The central bank also continued to signal gradual policy normalization despite the Philippine peso weakening against the US dollar to a more than 16-year low.
The Monetary Board on Thursday increased the benchmark rate by 25 basis points (bps) to 2.5%, as expected by nine out of 16 analysts in a BusinessWorld poll last week.
Interest rates on the overnight deposit and lending facilities were also hiked by 25 bps to 2% and 3%, respectively.
“The Monetary Board believes that a follow-through increase in the policy rate enables the BSP to withdraw its stimulus measures while safeguarding macroeconomic stability amid rising global commodity prices and strong external headwinds to domestic economic growth,” BSP Governor Benjamin E. Diokno said during a media briefing.
Mr. Diokno said that upside risks continue to cloud the inflation outlook with pressures arising from the “potential impact of higher global non-oil prices, the continued shortage in domestic fish supply, as well as pending petitions for transport fare hikes due to elevated oil prices.”
He said the BSP raised its average inflation forecast for this year to 5%, from 4.6% previously, exceeding its 2%-4% target band.
For 2023, the BSP’s inflation forecast was revised upward to 4.2% from 3.9% previously. Average inflation is expected to decline to 3.3% in 2024.
“In line with the ongoing normalization of its monetary policy settings, the BSP is prepared to take all necessary policy action to bring inflation toward a target-consistent path over the medium term and deliver on its primary mandate of price stability,” Mr. Diokno said.
After the BSP’s announcement, the Philippine peso sank to P54.70 versus the US dollar, the peso’s worst finish since Nov. 21. 2005’s P54.74.
The Philippine Stock Exchange index also closed 1.66% down to 6,065.23 on Thursday, before the BSP decision.
BSP Deputy Governor Francisco G. Dakila, Jr. said inflation is expected to average 5.6% in the second half of the year, citing May inflation and higher assumptions for global oil and non-oil prices as well as the approved provisional jeepney fare hike.
“Given the most recent developments, we see inflation averaging at about 5.6% in the second half of the year and this is attributable to continued rise in global commodity prices as well as more pronounced second-round effects on domestic goods and services,” Mr. Dakila said.
Inflation rose to 5.4% in May, the highest in three and a half years, amid the continued rise in food and fuel prices.
The implementation of a daily minimum wage hike in 14 regions and a P1 increase in fares for public utility jeepneys in Metro Manila, Central Luzon, Calabarzon and Mimaropa earlier this month will likely add to inflationary pressures.
Mr. Dakila said the BSP now expects the price of Dubai crude to average about $106.30 per barrel this year from the $104.04 per barrel projection given in May. The central bank also expects crude oil to average $95.30 per barrel for 2023 and $84.10 per barrel for 2024.
“The Monetary Board also reiterates its support for the carefully coordinated efforts of other government agencies as part of a whole-of-government approach in implementing non-monetary interventions to mitigate the impact of persistent supply-side factors on inflation,” said Mr. Diokno, who is set to take over the Finance department next month.
Mr. Dakila said targeted subsidies to the most affected sectors will help mitigate any second-round effects.
“The current problem now is supply so maybe in the longer term we can improve productivity to add to the supply because this is the basic reason why food prices are going up. Government could also look at, in the short term, while we are working on increasing productive capacity, we can probably revisit our non-tariff barriers to enable more supply coming outside the Philippines to come in,” BSP Senior Assistant Governor Iluminada T. Sicat added.
Meanwhile, Capital Economics Senior Asia Economist Gareth Leather said the BSP is unlikely to embark on a more aggressive tightening cycle.
“Given the BSP’s comments in the press conference, our previous forecast that the policy rate would end the year at 2.75% looks too dovish. We are changing this to 3.25%, but this is still less than is being priced in by financial markets,” Mr. Leather said.
ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail the Philippines can expect faster inflation and a weaker peso for the rest of the year with the BSP’s dovish stance.
“(Philippine peso) recently tumbled to multi-year weakness in reaction to dovish rhetoric from BSP and we could see the currency come under added pressure especially with the Fed signaling as much as 75 bps worth of tightening at the July meeting,” Mr. Mapa said.
As of Thursday, the peso has declined by P3.7 or 7.26% versus the dollar from its Dec. 31, 2021 finish of P51. For this month so far, the peso has dropped by P2.33 or 4.45% from the May 31 close of P52.37.
According to ANZ Southeast Asia and India Chief Economist Sanjay Mathur and economist Debalika Sarkar, they may revisit their forecasts if inflation continues to surge.
“Our current forecast is for the hiking cycle to conclude in Q1 23 when a terminal policy rate of 4.00% is reached — this was predicated on inflation coming back into the target range by then. Indeed, should inflation prove to be more stubborn, we will need to reassess this forecast,” they said.
The BSP will have its next policy review on Aug. 18.
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