BSP hikes rates, signals more to come

By Keisha B. Ta-asan, Reporter
THE PHILIPPINE central bank on Thursday raised its benchmark interest rate by 50 basis points (bps) for a second straight meeting, and signaled more tightening to tame red-hot inflation.
The Monetary Board (MB) increased its overnight borrowing rate by 50 bps to 6% as predicted by nine out of 18 analysts in a BusinessWorld poll last week.
This brought the policy rate to 6%, the highest in nearly 16 years or since May 2007 when it stood at 7.5%.
The rates on the overnight deposit and lending facilities were also increased to 5.5% and 6.5% respectively.
The BSP’s aggressive rate hike came after inflation accelerated to a 14-year high 8.7% in January, from 8.1% in December. January also marked the 10th consecutive month inflation was above the BSP’s 2-4% target range and its 7.5% to 8.3% forecast range for January. 
“The Monetary Board deems a strong follow-through monetary policy response as necessary to reduce the risk of a breach in the inflation target in 2024. An upward adjustment in the policy interest rate would also prevent inflation expectations from drifting further away from the target band,” BSP Governor Felipe M. Medalla said at a briefing after the MB meeting.
The central bank raised its average inflation forecast for 2023 to 6.1% from 4.5% previously. This is beyond the BSP’s 2-4% target range, and faster than the 5.8% full-year inflation in 2022.
The BSP also hiked its 2024 inflation projection to 3.1% from 2.8% previously.
Mr. Medalla said the inflation forecasts were upwardly adjusted after the faster-than-expected inflation in January and “the continued stronger rebound in domestic demand and (7.2%) gross domestic product (GDP) growth in Q4 2022.”
The economy grew by 7.6% in 2022, exceeding the government’s 6.5-7.5% target, and the fastest growth since 1975.
“Both headline and core inflation measures have also continued to increase, indicating a further broadening of price pressures, particularly in services. Meanwhile, inflation expectations have likewise risen further, underscoring the need to preempt the emergence of further second-round effects,” Mr. Medalla said.
Core inflation, which excludes volatile prices of food and fuel, jumped to 7.4% in January from 6.9% in December and 1.8% in the same month in 2022. This is the fastest core inflation print in more than two decades or since 8.2% in December 2000.
BSP Director Dennis D. Lapid of the Department of Economic Research said headline inflation will likely average 7.7% in the first half this year before decelerating to 5.4% in the third quarter and 3.8% by fourth quarter. 
Inflation is projected to ease to within the 2-4% target by early next year due to dissipation of supply-side pressures on commodities and negative base effects, Mr. Lapid said. 
However, upside risks may continue to weigh on inflation outlook due to rising global food uncertainties, continued domestic shortages in supply, additional fare hikes amid elevated oil prices, and the higher-than-expected wage adjustments this year, Mr. Medalla said.
The BSP chief said he expects inflation to be near 4% by November or December this year.
MORE RATE HIKESSince May 2022, the BSP has raised policy rates by a total of 400 bps.
Mr. Medalla said he expects economic growth to remain strong this year, adding that a 50-bp increase in policy rates would only reduce GDP growth by 0.04%.
The government targets 6-7% GDP expansion this year, slower than the 7.6% in 2022.
“Fortunately, the economy is quite strong. Maybe, we all underestimated pent-up demand,” he said.
The BSP chief also signaled another rate hike at its next meeting on March 23.
“It is unlikely we won’t increase the rate at the next meeting,” Mr. Medalla said, adding that he cannot rule out a “third” or “maybe a fourth” hike.
He also ruled out a 75-bp rate increase this year, unless it would be necessary to match the US Federal Reserve.
“The need for extraordinarily high interest rate increases like 75 (bps) was largely because inflation was also coming with a very weak and rapidly depreciating peso (last year)… So unless another large change in monetary policy happens somewhere else, I think we have done enough 75 (bps),” he added. 
The US Federal Reserve raised borrowing costs by 25 bps earlier this month, with a promise of more increases as it continues to fight against inflation. The rate hikes delivered by the Fed since March 2022 have now totaled 450 bps to a range of 4.5-4.75%.
Following the BSP’s policy announcement, the peso closed at P55.12 versus the greenback on Thursday, inching up by five centavos from Wednesday’s P55.17 finish, Bankers Association of the Philippines data showed.
According to analysts, the BSP will continue to deliver more rate increases at its next meetings to ensure inflation falls within target and inflation expectations will be managed.
“BSP’s latest inflation forecast and admission that price pressure has broadened could open the door for additional rate hikes in the coming months,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in a note.
“Given this new information and the obvious shift in tone from Governor Medalla, we now expect a 25-bp rate hike by the BSP at the March meeting with our forecast for BSP’s terminal rate at 6.25%,” Mr. Mapa said. 
For Gareth Leather, senior Asia economist of Capital Economics, said inflation may peak this month and drop steadily throughout the year as energy and food prices ease and growth slows.
“But inflation is unlikely to return to target before the end of the year, much later than in other parts of the region. As such, we think the central bank still has more work to do. We are raising our interest rate forecast, and now expect two more 25-bp rate hikes this year,” Mr. Leather said.
Meanwhile, Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said rate hikes are not enough to address inflation.
“While we now see at least an additional 25-bp interest rate increase in March, we are also sticking to our view that a partial rollback of this tightening cycle will start before the end of this year, to the tune of at least 50 bps in cuts in fourth quarter,” Mr. Chanco said.
“By then, we expect headline inflation to have returned comfortably within the 2-4% target range, while the economy will have shown a more noticeable loss in momentum,” he added.
The Monetary Board is next set to review policy on March 23 and on May 18.
Meanwhile, Mr. Medalla also added that a cut in big banks’ reserve requirement ratio (RRR) is “still feasible” at the end of first semester. However, he emphasized that he didn’t want to confuse markets by increasing policy and cutting the RRR at the same time.