Interest rates

MB raises interest rates by 75 basis points

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

“The Monetary Board has decided to increase the BSP (Bangko Sentral ng Pilipinas) overnight repo facility interest rate by 75 basis points (bps) to 5.0% effective tomorrow , November 18, 2022,” central bank governor Felipe Medalla said in a statement. briefing after the board meeting.

“As a result, the interest rates on the deposit and overnight lending facilities will be set at 4.5% and 5.5% respectively,” he added.

The announcement came as no surprise as Medalla had telegraphed the decision after the US Federal Reserve (Fed) ordered another massive 75 basis point hike on November 2.

On Thursday, the BSP chief said the central bank’s latest benchmark forecast pointed to a higher inflation path over the policy horizon, with full-year inflation exceeding the target by 2.0 to 4. .0% to 5.8% this year and 4.3% in 2023.

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“The forecast for 2024 also rose slightly to 3.1%,” the central bank said in a statement.

“In deciding to raise the policy interest rate again, the Monetary Board noted that core inflation rose sharply in October, indicating stronger pass-through from high food and energy prices, as well as impulses from the side demand on inflation,” Medalla said.

“At the same time, risks to the inflation outlook lean sharply to the upside through 2023 while remaining broadly balanced in 2024. Upside risks are associated with high international food prices due to rising fertilizer prices, trade restrictions and adverse weather conditions,” he added. added.

Inflation hit a 14-year high of 7.7% in October. Officials said earlier that this year’s peak would be reached that month, but now expect inflation to pick up before the end of the year.

Domestically, the BSP Governor said the impact of weather disruptions on fruit and vegetable prices, disruptions in the supply of key food items, such as sugar and meat, and rising demands pending tariffs could also put upward pressure on inflation.

The impact of a weaker than expected global economic recovery remains the main downside risk to the outlook.

“Given the increased likelihood of further second-round effects, lingering inflationary pressures and the dominance of upside risks to the inflation outlook, the Monetary Board recognized the need for aggressive monetary policy to preserve price stability,” Medalla said.

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

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

The Currency Council will continue to push for non-monetary government interventions to mitigate the impact of lingering supply pressures on commodity prices, including those aimed at alleviating supply shortages and bolstering the agricultural productivity.

“Looking forward, PASB will continue to take all necessary measures to bring inflation back to the medium-term target range, in line with its core mandate of maintaining price stability and financial stability,” he said. added.

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

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

“[I]It is inevitable that the BSP will maintain its 100 basis point interest rate differential with the Fed. A high inflation outlook in 2023, which should be the third consecutive year [using 2012 prices for 2021] if inflation exceeds the BSP’s 4% target, will force the central bank to maintain high interest rates for most of 2023,” Velasquez noted.

“A possible reduction may not come until the fourth quarter, as inflation falls within the target limits in the second half of the year.”