NextGen Day

Financial authorities increased the Bangko Sentral ng Pilipinas’ (BSP) benchmark interest rates by 50 basis points on Thursday, citing the need to keep enacting policies to combat the high inflation rate.

As of August 19, 2022, this resulted in the overnight reverse repurchase (RRP) rate of the central bank falling to 3.75 percent and the overnight repurchase (RP) rate rising to 4.25 percent.

BSP Governor Felipe Medalla stated in a video briefing that the most recent average inflation projection for this year has been increased to 5.4 percent, but the figures for 2023 and 2024 have been decreased to 4 percent and 3.2 percent, respectively.

Previously, these were set at 5 percent, 4.2 percent, and 3.3 percent, respectively, for 2022–2024.

While the estimates for the following two years are on target, the BSP’s average inflation forecast for this year is higher above the government’s planned range of 2 to 4 percent until 2024.

According to Medalla, “elevated inflation expectations further underscore the potential of future second round effects,” adding that “the inflation target remains at risk throughout the policy horizon owing to expanding pricing pressures.”

The possible impact of increased global non-oil prices, the ongoing scarcity of domestic fish supplies, the significant increase in the price of sugar, as well as outstanding applications for transportation ticket hikes, he said, continue to pose upside risks to the inflation outlook.

The primary downside risks to the projection, according to Medalla, are the impact of a weaker-than-expected global economic recovery and the reappearance of local Covid-19 (coronavirus disease 2019) infections.

“Due to these factors, the Monetary Board determined that more monetary action was required to stabilize inflation expectations and prevent further inflation goal violations over the policy horizon. The BSP now has more leeway to respond to inflationary pressures, and the positive GDP result in the first half of the year also enables domestic demand to maintain its recovery momentum despite ongoing hurdles,” he noted.

The central bank’s key policy rates have increased by 175 basis points so far this year as a result of the most recent rate hike.

Inflation increased last July, reaching its highest annual rate since October 2018 of 6.4 percent.

According to Medalla, this year’s peak in inflation is expected to occur in either October or November.

“We really don’t expect that the headline inflation will be closer to 3 percent than 4 percent until the second half of next year,” he said, adding that this still depends on a number of variables, including changes in the price of oil on the international market and the Federal Reserve’s key interest rate adjustments.

Additionally, Medalla noted that future monetary policy decisions remain data-dependent, citing the Fed rate changes and the movement in foreign exchange as key factors, as the economy experienced slower growth in the second quarter of this year at 7.4 percent compared to the previous quarter’s 8.2 percent.

The domestic economic recovery, according to him, is still “strong enough to withstand more tightening if necessary.”

Any changes to the BSP’s key rates, according to Medalla, will affect domestic output, but because the central bank’s objective is price stability, monetary authorities will prioritize price stability over domestic economic growth.

We place a high priority on maintaining an inflation path that is consistent with our target. And in our opinion, under those conditions, respectable development is still feasible. We obviously care if that respectable growth is lower or within the DBCC’s (Development Budget Coordination Committee) target range of 6.5 to 7.5 percent, but price stability is our first priority, he continued.

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