Philippines signals more rate action after half-point move

THE Philippine central bank lifted its benchmark interest rate to a 14-year high on Thursday (Dec 15), while signalling more tightening to tame the quickest inflation in as many years.

Bangko Sentral ng Pilipinas (BSP) increased the overnight reverse repurchase rate by 50 basis points to 5.5 per cent, as predicted by all 21 analysts in a Bloomberg survey. That is the third half-point move in this tightening cycle, and follows a 75 basis point increase at the last meeting.

“(The) monetary board deems it necessary to take aggressive monetary action to bring headline inflation back to within target as soon as possible,” governor Felipe Medalla said at a briefing to announce the decision. It is a “low probability event” that the terminal rate will be the same as the current rate, he said.

Although consumer price gains at 8 per cent in November is double the ceiling of the BSP’s 2 to 4 per cent target band, the BSP slowed the pace of increases following the Federal Reserve’s downshift, which should help take the pressure off the peso.

That bodes well for a nation that imports key commodities such as fuel and rice, and is vulnerable to inflation shocks caused by exchange rate swings. The Philippines, among the early movers in the tightening wave in South-east Asia, has raised borrowing costs by a cumulative 350 basis points this year.

“Less pronounced pressure on FX spot allowed BSP to downshift,” said Nicholas Mapa, a senior economist at ING Group in Manila. The BSP is still “likely on the hike path as inflation remains a concern and with Fed projected to hike” in the first half of 2023.

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The Philippine central bank retained its inflation view for the current year at 5.8 per cent, while it expects inflation to average 4.5 per cent next year, a level that is above the BSP’s target band, and ease to 2.8 per cent only in 2024.

The BSP remains steadfast in its primary mandate of ensuring price stability, Medalla said. The central bank remains ready to take action towards that end, he said.

Yet even with higher borrowing costs, the economy is still seen as among Asia’s bright spots, with analysts expecting gross domestic product (GDP) to grow 7 per cent this year. The government this month lowered its 2023 GDP forecast amid a worsening global outlook. BLOOMBERG