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BSP Hikes Rates By 50 bps, Signals More Tightening

The Bangko Sentral ng Pilipinas (BSP) has raised its benchmark interest rate to its highest in 14 years and signaled more tightening albeit at a slower pace.

Photo Insert: The central bank has, since May, increased borrowing costs by a cumulative 350 bps.

The Monetary Board (MB) increased its overnight borrowing rate by 50 basis points (bps) to 5.5%, as predicted by analysts last week. This brought the policy rate to the highest since November 2008 when it was at 6%. The move followed the 50-bp hike by the US Federal Reserve at its Dec. 13-14 meeting, which brought its own policy rate to 4.25-4.5%.

The BSP’s rates on the overnight deposit and lending facilities were also increased to 5.0% and 6.0%, respectively. The central bank has, since May, increased borrowing costs by a cumulative 350 bps.

“The Monetary Board arrived at its decision Dec. 14, after noting the further uptick in headline and the sharp rise in core inflation in November amid pent-up demand,” BSP Governor Felipe M. Medalla said at a briefing after the policy meet.

Headline inflation accelerated to a 14-year high of 8.0% in November, from 7.7% in October. For the January-to-November period, inflation averaged 5.6%. Core inflation, which excludes food and fuel volatile prices, rose 6.5% in November from 5.9% in October and 2.4% in November 2021. In the eleven months to November, core inflation averaged 3.7%.

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Medalla said the BSP kept its average inflation forecast for the year at 5.8%, but raised the 2023 average inflation projection to 4.5%, from 4.3% previously. These projections are still above the BSP’s 2-4% target band. Meanwhile, the 2024 inflation forecast was lowered to 2.8% from 3.1% previously due to “the further easing in oil prices, peso appreciation, and the slightly lower domestic growth outlook resulting in part from the BSP’s cumulative policy rate adjustments.”

Medalla said upside risks to the inflation outlook are mainly from higher global food prices due to elevated fertilizer prices and supply chain disruptions. He stressed: “On the domestic front, trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare hikes, as well as potential wage adjustments in 2023 could push inflation upwards.”

The impact of a slower global economic recovery is still the major downside risk to the outlook, he added.

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BSP Deputy Governor Francisco G. Dakila, Jr., meantime, said the central bank revised its inflation forecast for next year due to the faster-than-expected November inflation print and the looming impact of approved water rate hikes starting 2023.

“We are now also seeing that inflation may further go up in December, although this would be only very slightly,” Dakila said, adding:. “On the other hand, this would be partly offset by the lower crude oil price assumption as well as the strengthening of the peso.”

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Medalla said the latest forecasts point to inflation peaking in December, not November as earlier expected, owing to higher food prices caused by recent typhoons, higher liquefied petroleum gas (LPG) prices and electricity rates.

The BSP chief said inflation is expected to return to the 2-4% target band by the second half of 2023, and back to the low end of the target range by the fourth quarter of 2023 and first quarter of 2024 due to base effects.

Following the BSP’s announcement, the Philippine peso closed at P55.685 versus the US dollar, up by six centavos from its P55.745 finish on Wednesday. Year-to-date, the peso has weakened by P4.685 or 8.4% from its P51 close on Dec. 31, 2021.

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“The BSP’s main priority continues to be bringing inflation back to the target. We remain prepared to adjust our stance as necessary to safeguard price stability over the medium term. As always, our actions will remain data-dependent and guided by latest information available,” Medalla said.

“The more favorable inflation dynamics overseas certainly allows consideration for moderate pace of increase in the overnight reverse repurchase rate. Having said that, the impact of monetary policy also takes time to manifest fully in inflation and GDP data,” he added.

Medalla also said that the current regulatory relief measures will be only kept until December, while measures on the credit card cap will be extended and subject to review next month.

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“The majority of our pandemic-related measures will expire by the end of 2022 given that the economy has achieved sufficient growth momentum,” he said.

The Philippine economy expanded by 7.6% in the third quarter, bringing the year-to-date average growth to 7.7%. Economic managers expect full-year GDP growth to settle within 6.5-7.5%. But the BSP said, the pace of rate increases next year could slow down depending on the data.

“If I were betting my own money on whether it’s 25 or 50 basis points…more likely, it could go either way, it depends on the data,” Medalla said. “But it would be harder for me to bet that this is the last rate hike.”

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The BSP chief said he sees less urgency to match the US Federal Reserve’s monetary tightening next year as bringing inflation back to the 2-4% target remains their top priority.

Following the policy announcement, economists are expecting more rate hikes next year.

"We think the central bank will raise interest rates again early next year, but with inflation likely to peak soon and growth slowing, the BSP’s tightening cycle is nearing an end,” Capital Economics Senior Asia Economist Gareth Leather said in a note.

He said that headline inflation in the Philippines may likely peak in the coming months as the impact of supply disruptions from Typhoon Noru fades.

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“The central bank today struck a fairly dovish tone on inflation, stating that it expected [inflation] to peak in December and fall back to target in the second half of next year (a little earlier than we anticipate),” Leather said. He expects the BSP to raise interest rates by 25 bps early next year, and this would mark the end of the tightening cycle.

For ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa, inflation would still remain elevated next year due to the persistent second-round effects. “With inflation expected to stay high, we believe BSP will retain its hawkish stance going into 2023, taking its cue mainly from the Fed while also monitoring the path of inflation,” he said.

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Mapa added that the BSP could bring its policy rate to as high as 6-6.25% next year. “We think the BSP is determined to keep the current interest rate differential with the US, amid a weak peso and elevated inflation,” Oxford Economics Assistant Economist Makoto Tsuchiya said in a note.

Tsuchiya also expects the central bank to hike by 25 bps in the first quarter of 2023, bringing the policy rate to 5.75%. “Our US team expects the US Fed to raise the policy rate by 25 bps at its first meeting in 2023, and we expect the BSP to match the move, rather than outpace the Fed,” he said. The US Federal Reserve has raised 425 bps so far this year.

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