17 0 0 1 month ago 6 min to read

BSP raises rates by 50 basis points as long as inflation stays high.

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The main driver of the higher revisions to the Bangko Sentral ng Philippines’ (BSP) benchmark interest rates, which were increased by 50 basis points on Thursday, is still the country’s elevated domestic inflation rate.
The overnight reverse repurchase (RRP) rate will increase to 6 percent, the same as in August 2008, the overnight repurchase rate will increase to 6.5 percent, and the overnight deposit rate would decrease to 5.5 percent, according to BSP Governor Felipe Medalla a briefing.

He added, “The Monetary Board highlighted that the newest baseline inflation prediction path has shifted higher relative to the previous assessment in deciding to hike the policy interest rate anew.

This is because monetary authorities now expect inflation to average 6.1 percent this year, significantly higher than the government’s target range of 2 to 4 percent and up from the previous estimate of 4.3 percent in November.
The average is predicted to slow to 3.1% in 2024, the same as it was in November.
According to monetary authorities, factors that could cause inflation to increase include rising domestic and international food prices, increases in transportation costs, sugar prices, and salary adjustments.
Medalla claimed that the higher-than-expected 8.7 percent inflation rate last January, a new 14-year high, and exceeded estimates that the rate of price increases likely peaked last December, was a contributing factor in the upward revision to the average inflation prediction.
He claimed that by October of this year, inflation is expected to return to within-target levels.
According to Medalla, another reason for the acceleration of the inflation rate is the higher-than-expected domestic economic recovery, which after growing by 7.6 percent surpassed the government’s projection for growth of 6.5 to 7.5 percent in 2022.
He added that “inflation expectations have likewise risen further, underscoring the need to pre-empt the emergence of further second-round effects.” He said that “both headline and core inflation measures have also continued to increase, indicating a further broadening of price pressures, particularly in services.”

Medalla stated that he supports the government’s actions to import more food goods as well as other actions that will increase productivity because inflation is caused by supply shocks.
According to him, the most recent change in the key interest rates of the central bank is “a significant follow-through monetary policy reaction” and is required “to lower the danger” of a violation of the inflation target for next year, which is still set at between 2 and 4 percent.

The rate increase, according to Medalla, “would also stop inflation expectations from edging further away from the target band.”

“The Monetary Board also considers that with domestic growth above expectations in 2022, monetary policy can serve to moderate potential demand-side pressures and second-round impacts without unduly slowing down the sustained momentum of economic expansion,” the official added.
He asserted that an increase in the key interest rates by 50 basis points would probably result in a 0.04 percent reduction in domestic output.

With the high inflation rate and the ongoing domestic economic recovery, Medalla ruled out a short-term break in the central bank’s rate hike cycle.

It’s doubtful that we won’t raise the rate at the upcoming meeting, he added.
A reduction in banks’ reserve requirement ratios (RRR) is still an option, according to Medalla, at least for the first half of this year, but not while the BSP is raising its benchmark interest rates, in order to avoid confusing the market and hurting the banks.

This is because a rate increase would result in less liquidity whereas a reduction in the RRR would allow for more liquidity to enter the financial system.

Personally, I still believe that reducing reserve requirements before the conclusion of the first semester is still possible, given what will happen, he continued.

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